<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement / / Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
SEARCH CAPITAL GROUP, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
NOT APPLICABLE
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
/X/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE> 2
SEARCH CAPITAL GROUP, INC.
700 NORTH PEARL STREET
SUITE 400
DALLAS, TEXAS 75201
August 19, 1996
Dear Stockholders:
You are cordially invited to attend a special meeting of stockholders
of Search Capital Group, Inc. (the "Company") to be held at 9:00 a.m. local
time, October 1, 1996 at the principal executive offices of the Company located
at 700 North Pearl Street, Suite 400, Dallas, Texas 75201.
At the meeting you will be asked to approve an increase in the number
of shares reserved for the Company's 1994 Employee Stock Option Plan and a
one-for-eight reverse stock split of the Company's Common Stock and Preferred
Stock. In addition, you will be asked to approve certain clarifying amendments
to the terms of the Company's 9%/7% Convertible Preferred Stock for the purpose
of enabling the Company to issue shares of that series in future acquisitions
or stock offerings. Finally, you will be asked to transact such other business
as may properly come before the meeting.
The formal Notice of Special Meeting of Stockholders and Proxy
Statement accompanying this letter provide detailed information concerning the
matters to be considered and acted upon at the meeting.
It is important that your shares be represented at the meeting,
whether or not you attend personally. I urge you to sign, date and return the
enclosed proxy at your earliest convenience.
George C. Evans
Chairman, President and Chief Executive Officer
<PAGE> 3
SEARCH CAPITAL GROUP, INC.
700 NORTH PEARL STREET
SUITE 400
DALLAS, TEXAS 75201
(214) 965-6000
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD OCTOBER 1, 1996
To the Stockholders of
Search Capital Group, Inc.
Notice is hereby given that a special meeting of stockholders of
Search Capital Group, Inc., a Delaware corporation (the "Company"), will be
held at the Company's offices located at 700 North Pearl Street, Suite 400,
Dallas, Texas on October 1, 1996 at 9:00 a.m. local time, for the following
purposes:
1. to approve an increase in the number of shares of the
Company's Common Stock for which options may be granted
pursuant to the Company's 1994 Employee Stock Option Plan;
2. to approve certain clarifying amendments to the terms of the
Company's 9%/7% Convertible Preferred Stock, which are
intended to enable the Company to issue shares of that series
in future acquisitions or stock offerings;
3. to approve a one-for-eight "reverse" stock split of the
Company's Common Stock and Preferred Stock; and
4. to transact such other business as may properly come before
the meeting.
Only stockholders of record at the close of business on August 16,
1996 are entitled to notice of and to vote at the meeting or any adjournment
thereof.
It is desirable that as large a proportion as possible of the
stockholders' interests be represented at the meeting. Whether or not you plan
to be present at the meeting, you are requested to sign and return the enclosed
proxy in the envelope provided so that your stock will be represented. The
giving of such proxy will not affect your right to vote in person, should you
later decide to attend the meeting. Please date and sign the enclosed proxy
and return it promptly in the enclosed envelope.
By Order of the Board of Directors,
GEORGE C. EVANS
Chairman, President and Chief Executive Officer
Dallas, Texas
August 19, 1996
<PAGE> 4
SEARCH CAPITAL GROUP, INC.
700 NORTH PEARL STREET, SUITE 400
DALLAS, TEXAS 75201
PROXY STATEMENT FOR
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD OCTOBER 1, 1996
This Proxy Statement is furnished to stockholders of Search Capital
Group, Inc., a Delaware corporation (the "Company"), in connection with the
solicitation of proxies by the Board of Directors of the Company for use at a
special meeting of stockholders to be held on October 1, 1996. Proxies in the
form enclosed will be voted at the meeting, if properly executed, returned to
the Company prior to the meeting and not revoked. A proxy may be revoked at
any time before it is voted either in person at the meeting or by giving prior
written notice to the Secretary of the Company. This proxy statement and the
accompanying form of proxy are first being sent or given to the Company's
stockholders on or about August 21, 1996.
OUTSTANDING CAPITAL STOCK
The record date for stockholders entitled to notice of, and to vote
at, the special meeting is August 16, 1996. At the close of business on that
date, the Company had issued and outstanding and entitled to receive notice of,
and to vote at, the meeting 27,521,563 shares of Common Stock, $.01 par value
("Common Stock"), 400,000 shares of 12% Senior Convertible Preferred Stock
(with a liquidation preference of $5.00 per share) ("12% Preferred Stock"),
16,952,594 shares of 9%/7% Convertible Preferred Stock (with a liquidation
preference of $3.50 per share) ("New Preferred Stock) and 2,554,060 shares of
Series B 9%/7% Convertible Preferred Stock (with a liquidation preference of
$3.50 per share) ("Series B Preferred Stock"). The 12% Preferred Stock, New
Preferred Stock and Series B Preferred Stock are referred to collectively as
"Preferred Stock." No other class of securities of the Company is entitled to
notice of, or to vote at, the special meeting.
ACTION TO BE TAKEN AT THE MEETING
The accompanying proxy, unless the stockholder otherwise specifies in
the proxy, will be voted FOR each of the following proposals (the "Proposals"):
1. The approval of an increase in the number of shares of the
Company's Common Stock for which options may be granted
pursuant to the Company's 1994 Employee Stock Option Plan;
2. The approval of certain clarifying amendments to the terms of
the Company's New Preferred Stock; and
3. The approval of amendments to the Company's Restated
Certificate of Incorporation to effect a one-for-eight
"reverse" stock split of the Company's Common Stock and
Preferred Stock.
In addition, the accompanying proxy will be voted, in the discretion
of the proxy holders, as to the transaction of such other business as may
properly come before the meeting.
Where stockholders have appropriately specified how their proxies are
to be voted, they will be voted accordingly. If any other matter or business
is brought before the meeting, the proxy holders may vote the proxies in their
discretion. The Board of Directors is not presently aware of any other matters
or business to be brought before the meeting.
QUORUM AND VOTING
The presence, in person or by proxy, of the holders of a majority of
the aggregate outstanding shares of Common Stock, 12% Preferred Stock, Series B
Preferred Stock and New Preferred Stock, together as one class, is necessary to
constitute a
<PAGE> 5
quorum at the special meeting in order to vote on each of the Proposals. In
addition, for a quorum to exist for a vote on Proposal 2 or 3, there must be
present at the meeting, in person or by proxy, the holders of a majority of (i)
the outstanding shares of New Preferred Stock as to Proposal 2 and (ii) the
outstanding shares of each of the 12% Preferred Stock, the Series B Preferred
Stock and the New Preferred Stock as to Proposal 3.
The affirmative vote of the holders of a majority of the aggregate
outstanding shares of Common Stock, 12% Preferred Stock, Series B Preferred
Stock and New Preferred Stock represented in person or by proxy at the meeting,
voting together as one class, is necessary to approve Proposal 1. The
affirmative vote of the holders of a majority of the outstanding shares of
Common Stock, 12% Preferred Stock, Series B Preferred Stock and New Preferred
Stock, voting together as one class, and the affirmative vote of the holders of
two-thirds of the outstanding shares of New Preferred Stock, voting as a
separate class, are necessary to approve Proposal 2. The affirmative vote of
the holders of a majority of the outstanding shares of Common Stock, 12%
Preferred Stock, Series B Preferred Stock and New Preferred Stock, voting
together as one class, the affirmative vote of the holders of two-thirds of the
outstanding shares of New Preferred Stock, voting as a separate class, and the
affirmative vote of the holders of a majority of the outstanding shares of each
of the Series B Preferred Stock and 12% Preferred Stock, each voting as a
separate class, are necessary to approve Proposal 3.
Each share of Common Stock, 12% Preferred Stock, Series B Preferred
Stock and New Preferred Stock will have one vote on each of the proposals.
Shares represented at the meeting but not voted for or against a proposal at
the meeting, such as abstentions or "broker non-votes," will be counted in
determining a quorum but will have the effect of votes against the proposal. A
"broker non-vote" occurs if a broker or other nominee holding shares for a
beneficial owner does not have discretionary voting power as to such shares and
does not receive specific voting instructions from the beneficial owner.
<PAGE> 6
PRINCIPAL HOLDERS OF CAPITAL STOCK
The following table sets forth certain information, as of August 6,
1996, relating to the beneficial ownership of the Common Stock, 12% Preferred
Stock, Series B Preferred Stock and New Preferred Stock (i) by any person or
"group," as that term is used in Section 13(d)(3) of the Securities Exchange
Act of 1934, as amended, known to the Company to own beneficially 5% or more of
the outstanding Common Stock, 12% Preferred Stock, Series B Preferred Stock or
New Preferred Stock, (ii) by each current director of the Company and each
executive officer of the Company named in the Summary Compensation Table (see
"Executive Compensation"), and (iii) by all current directors and executive
officers of the Company as a group. Except as otherwise indicated, each of the
persons named below is believed by the Company to possess sole voting and
investment power with respect to the shares of Common Stock, 12% Preferred
Stock, Series B Preferred Stock or New Preferred Stock beneficially owned by
such person.
<TABLE>
<CAPTION>
Amount and Nature of Beneficial Ownership(1)
Name of Director ------------------------------------------------------------------------
or Executive Officer Shares of Shares of New Shares of 12% Shares of
or Name and Address Common Preferred Preferred Series B
of Beneficial Owner Stock(2) Stock Stock Preferred Stock
- ---------------------- ---------- ----------------- ------------------ ---------------
<S> <C> <C> <C> <C>
Hall Phoenix/Inwood, Ltd. (3) 7,814,556 (4) 2,032,812 -- --
750 N. St. Paul
Suite 200
Dallas, Texas 75201
Value Partners, Ltd. (5) 2,160,174 3,177,819 -- --
2200 Ross Avenue
Suite 4660 W
Dallas, Texas 75201
Greg Muns, M.D. -- -- 20,000 --
1319 Shores Circle
Rockwall, Texas 75087
Sam Coker Retirement Trust -- -- 20,000 --
Rt. 2, Box 50
Millsap, Texas 76066
Dealers Alliance Credit Corp. 2,554,060 (6) -- -- 766,218
1000 RIDC Plaza
P.O. Box 11432
Pittsburgh, Pennsylvania 15238
R-H Capital Partners, L.P. -- -- -- 1,229,142(7)
Atlanta Financial Center
3333 Peachtree Road
Atlanta, Georgia 30326
Kellett Investment Corporation -- -- -- 558,700(8)
200 Galleria Parkway
Suite 1800
Atlanta, Georgia 30339
A. Brean Murray 483,558 (9) -- -- --
Luther H. Hodges, Jr. 112,000 (10) 36,363 -- --
James F. Leary 102,500 (10) 35,599 -- --
William H. T. Bush 100,000 (11) -- -- --
Richard F. Bonini 122,862 (10) 48,599 -- --
George C. Evans 1,021,593 (12) 27,091 -- --
George C. Evans, as
proxyholder for SBM Trust 812,617 (13) -- -- --
Joe B. Dorman 75,000 (14) -- -- --
Robert D. Idzi 174,222 (15) 27,180 -- --
Anthony J. Dellavechia 125,000 (16) 36,363 -- --
Andrew L. Tenney 97,222 (17) 27,272 -- --
All directors and executive 3,322,044 (18) 322,412 -- --
officers as a group (15 persons)
</TABLE>
- ------------------------
* Less than 1%
<TABLE>
<CAPTION>
Percentage of Class Outstanding
Name of Director ---------------------------------------------
or Executive Officer New 12% Series B
or Name and Address Common Preferred Preferred Preferred
of Beneficial Owner Stock Stock Stock Stock
- ---------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Hall Phoenix/Inwood, Ltd. (3) 25.1% 12.0% -- --
750 N. St. Paul
Suite 200
Dallas, Texas 75201
Value Partners, Ltd. (5) 7.9% 18.7% -- --
2200 Ross Avenue
Suite 4660 W
Dallas, Texas 75201
Greg Muns, M.D. -- -- 5% --
1319 Shores Circle
Rockwall, Texas 75087
Sam Coker Retirement Trust -- -- 5% --
Rt. 2, Box 50
Millsap, Texas 76066
Dealers Alliance Credit Corp. 9.3% -- -- 30.0%
1000 RIDC Plaza
P.O. Box 11432
Pittsburgh, Pennsylvania 15238
R-H Capital Partners, L.P. -- -- -- 48.1%
Atlanta Financial Center
3333 Peachtree Road
Atlanta, Georgia 30326
Kellett Investment Corporation -- -- -- 21.9%
200 Galleria Parkway
Suite 1800
Atlanta, Georgia 30339
A. Brean Murray 1.7% -- -- --
Luther H. Hodges, Jr. * * -- --
James F. Leary * * -- --
William H. T. Bush * -- -- --
Richard F. Bonini * * -- --
George C. Evans 3.6% * -- --
George C. Evans, as
proxyholder for SBM Trust 2.9% -- -- --
Joe B. Dorman * -- -- --
Robert D. Idzi * * -- --
Anthony J. Dellavechia * * -- --
Andrew L. Tenney * * -- --
All directors and executive 11.2% 1.9% -- --
officers as a group (15 persons)
</TABLE>
- ------------------------
* Less than 1%
-3-
<PAGE> 7
(1) The information as to beneficial ownership of Common Stock, 12%
Preferred Stock, Series B Preferred Stock and New Preferred Stock has
been furnished by the Company's transfer agent and the respective
shareholders, directors and officers of the Company. Each named
person or group is deemed to be the beneficial owner of securities
that may be acquired by such person or group within 60 days through
the exercise of options, warrants and rights, if any, and such
securities are deemed to be outstanding for the purpose of computing
the percentage of stock beneficially owned by such person or group.
Such securities are not deemed to be outstanding for the purpose of
computing the percentage of stock beneficially owned by any other
person or group.
(2) The numbers in the column for shares of Common Stock do not reflect
the shares of Common Stock that may be obtained through conversion of
the New Preferred Stock, Series B Preferred Stock or 12% Preferred
Stock. Each share of New Preferred Stock and Series B Preferred Stock
is convertible by its holder into two shares of Common Stock. Each
share of 12% Preferred Stock is convertible by its holder into one
share of Common Stock.
(3) Hall Phoenix/Inwood, Ltd. ("HPIL") is a Texas limited partnership
whose sole general partner is Phoenix/Inwood Corporation ("PIC"),
which is a wholly-owned subsidiary of Hall Financial Group, Inc.
("HFG"). Accordingly, PIC and HFG may be deemed to share the power to
direct the voting and disposition of the shares owned by HPIL.
(4) Includes (i) warrants to purchase 3,000,000 shares of Common Stock at
the price of $2.00 per share, on or before November 30, 2000, and (ii)
warrants to purchase 676,178 shares of Common Stock at $2.00 per share
(increasing $0.25 each year) on or before March 15, 2001.
(5) Value Partners, Ltd. is a Texas limited partnership of which Fisher
Ewing Partners, a Texas general partnership composed of Richard W.
Fisher and Timothy G. Ewing, serves as the general partner.
Accordingly, Fisher Ewing Partners, Mr. Fisher and Mr. Ewing may be
deemed to share the power to direct the voting and disposition of the
shares owned by Value Partners, Ltd.
(6) Includes warrants to purchase 1,277,030 shares at $2.00 per share
(increasing $0.25 per year) on or before March 15, 2001. Fifty
percent of these securities are escrowed until May 2, 1997 and the
remainder are escrowed until August 3, 1996 to secure certain
indemnities in favor of the Company.
(7) Twenty-five percent of these shares are escrowed until May 6, 1997 and
an additional 25% of these shares are escrowed until August 6, 1997 to
secure certain indemnities in favor of the Company. R-H Capital
Partners, L.P. is a Georgia limited partnership of which
R-H/Travelers, L.P. serves as general partner. R-H Capital, Inc.
serves as general partner of R-H/Travelers, L.P. Accordingly, R-H
Capital, Inc. and R-H/Travelers, L.P. may be deemed to share the
power to direct the voting and disposition of the shares owned by R-H
Capital Partners, L.P.
(8) Twenty-five percent of these shares are escrowed until May 2, 1997 and
an additional 25% of these shares are escrowed until August 3, 1997 to
secure certain indemnities in favor of the Company.
(9) Includes (i) warrants to purchase 10,000 shares, at $8.75 per share,
on or before December 20, 1998, (ii) warrants to purchase 113,558
shares at $9.60 per share on or before December 10, 1998, (iii)
warrants to purchase 250,000 shares at $1.09 per share on or before
June 29, 2005, and (iv) warrants to purchase 50,000 shares at $1.16
per share on or before March 27, 2006.
(10) Includes (i) warrants to purchase 50,000 shares at $1.09 per share on
or before June 29, 2005, and (ii) warrants to purchase 50,000 shares at
$1.16 per share on or before March 27, 2006. As to Mr. Hodges, also
includes 1,000 shares owned by Mr. Hodges' spouse, as to which Mr.
Hodges has shared voting and investment power.
(11) Represents warrants to purchase 50,000 shares at $1.375 per share on
or before August 4, 2005 and warrants to purchase 50,000 shares at
$1.16 per share on or before March 27, 2006.
(12) Includes (i) warrants to purchase 500,000 shares at $1.09 per share
on or before June 29, 2005 and (ii) options issued under the 1994
Employee Stock Option Plan to purchase 500,000 shares of Common Stock
at $1.09 per share on or before January 20, 2005, which have vested.
(13) Mr. Evans has been designated by the Company's Board of Directors to
hold the irrevocable proxy to vote the 812,127 shares held of record
by the SBM Trust. He has no other relationship with the SBM Trust.
(14) Represents (i) warrants to purchase 25,000 shares at $1.09 per share
on or before June 29, 2005, (ii) options issued under the 1994
Employee Stock Option Plan to purchase 25,000 shares of Common Stock
at $1.09 per share on or before February 20, 2005, which have vested,
and (iii) warrants to purchase 25,000 shares at $1.26 per share on or
before March 27, 2006.
(15) Includes options issued under the 1994 Employee Stock Option Plan to
purchase 102,000 shares at $1.09 per share on or before January 15,
2005, which have vested, and warrants to purchase 50,000 shares at
$1.26 per share on or before March 27, 2006.
(16) Represents (i) warrants to purchase 25,000 shares at $1.375 per share
on or before August 4, 2005, (ii) warrants to purchase 50,000 shares
at $1.25 per share on or before January 16, 2006, and (iii) options
issued under the 1994 Employee Stock Option Plan to purchase 50,000
shares at $1.25 per share on or before January 16, 2006, which have
vested.
(17) Includes warrants to purchase 25,000 shares at $1.25 per share on or
before January 16, 2006 and options issued under the 1994 Employee
Stock Option Plan to purchase 50,000 shares at $1.26 per share on or
before March 27, 2007, which have vested.
(18) Includes (i) warrants to purchase an aggregate of 1,573,558 shares and
(ii) options issued under the 1994 Employee Stock Option Plan to
purchase an aggregate of 740,500 shares.
-4-
<PAGE> 8
EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth information for the fiscal year ended
September 30, 1995 and the six-month transition period ended March 31, 1996
regarding the compensation of each individual who served as the Company's Chief
Executive Officer during the six-month period ended March 31, 1996 and each of
the Company's four most highly compensated executive officers (other than the
Chief Executive Officer) who served as an executive officer of the Company at
the end of the six-month period ended March 31, 1996. None of the named
individuals was an employee during the fiscal year ended September 30, 1994.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------------------- LONG TERM
COMPENSATION
--------------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS/SAR'S (#) COMPENSATION ($)
--------------------------- ----- ---------- --------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
George C. Evans, 1996 (1) 150,000 185,000 -- -- --
Chairman, Pres., CEO 1995 162,734 112,500 -- 1,000,000 (3) --
(from 1/20/95) (2)(5) 1,000,000 (4)
Robert D. Idzi 1996 (1) 66,666 35,000 -- 50,000 (7) --
EVP, CFO and Treasurer(2) 1995 117,308 5,000 -- 204,000 (3) 27,462 (8)
Anthony J. Dellavechia 1996 (1) 31,250 25,000 -- 50,000 (7) 26,500 (9)
Sr. EVP, Operations Director(2) -- 50,000 (6)
Joe B. Dorman (2) 1996 (1) 55,833 25,000 -- 25,000 (7) --
SVP, General 25,000 (6)
Counsel and Secretary 1995 67,128 -- -- 50,000 (3) --
50,000 (4)
Andrew L. Tenney 1996 (1) 62,499 25,000 -- 25,000 (7) --
EVP and Operations Director (2) 25,000 (6)
1995 79,775 -- -- 50,000 (3) --
50,000 (4)
</TABLE>
- ------------------------------------------
(1) The compensation shown for 1996 represents compensation for the
six-month transition period ended March 31, 1996.
(2) Mr. Evans was elected President, Chief Executive Officer and Chief
Operating Officer effective January 20, 1995. In May 1995, Mr. Evans
was also elected Chairman of the Board of Directors. Mr. Idzi was
elected Chief Financial Officer in October 1994, Treasurer in January
1995, and Executive Vice President in February 1996. Mr. Dellavechia
joined the Company as Senior Executive Vice President and Operations
Director in January 1996. Mr. Dorman joined the Company as General
Counsel in February 1995, was elected Senior Vice President in March
1995 and was elected Secretary in May 1995. Mr. Tenney was elected
Operations Director in January 1995, and in May 1995, was elected
Executive Vice President. On April 1, 1996, Mr. Tenney resigned as an
executive officer of the Company and worked as a consultant to the
Company until June 30, 1996. On July 1, 1996, Mr. Tenney assumed the
position of Executive Vice President of Marketing.
(3) Includes newly granted options as well as replacement options granted
in exchange for the cancellation of previously granted options, as
follows: for Mr. Evans, 500,000 options granted on January 20, 1995,
all subsequently replaced on June 29, 1995 by the 500,000 options
which he currently holds; for Mr. Tenney, 25,000 options granted on
January 23, 1995, all subsequently replaced on June 29, 1995 by the
25,000 options which he currently holds; for Mr. Idzi, 102,000 options
granted on January 15, 1995, all subsequently replaced on June 29,
1995 by the 102,000 options which he currently holds; for Mr. Dorman,
25,000 options granted on February 20, 1995, all subsequently replaced
on June 29, 1995 by the 25,000 options which he currently holds.
(4) Includes newly granted warrants as well as replacement warrants
granted in exchange for the cancellation of previously granted
warrants, as follows: for Mr. Evans, 500,000 warrants granted on May
10, 1995, all subsequently replaced on June 29, 1995 by the 500,000
warrants which he currently holds; for Mr. Tenney, 25,000 warrants
granted on May 10, 1995, all subsequently replaced on June 29, 1995 by
25,000 warrants which he currently holds; for Mr. Dorman, 25,000
warrants granted on May 10, 1995, all subsequently replaced on June
29, 1995 by 25,000 warrants which he currently holds.
-5-
<PAGE> 9
(5) In June 1995, the Board determined to issue to Mr. Evans options or
warrants (to be determined at a later date) to purchase 1,500,000
shares of Common Stock at a price of $1.375 per share. These warrants
or options will be issued to Mr. Evans in 500,000 share portions upon
the occurrence of the following conditions:
(a) 500,000 shares when the Company earns $1 million before taxes
and dividends by the fiscal year ending March 31, 1997;
(b) 500,000 shares when the market price of the Company's Common
Stock reaches $3.50 per share; and
(c) 500,000 shares when the market price of the Company's Common
Stock reaches $5.00 per share.
(6) Represents options granted on March 27, 1996.
(7) Represents warrants granted on March 27, 1996.
(8) Represents relocation reimbursements.
(9) Represents consulting fees paid to Mr. Dellavechia during the
transition period.
The foregoing executive officers receive health and disability
insurance benefits which do not exceed 10% of their respective aggregate
salaries and bonuses. These benefits are also provided to all other employees
of the Company.
The Company has no long-term incentive plans, pension plans, or stock
appreciation rights plans. The Company adopted, as of August 1, 1994, its 1994
Employee Stock Option Plan, which was approved at its annual meeting of
stockholders in May 1995.
Options under the Company's 1994 Employee Stock Option Plan and
warrants to purchase Common Stock were granted to the executive officers of the
Company listed below in the six-month period ended March 31, 1996, as
summarized in the following table.
OPTION AND WARRANT GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
NUMBER OF PERCENT APPRECIATION FOR
SECURITIES OF TOTAL WARRANTS OPTION OR WARRANT
UNDERLYING AND OPTIONS GRANTED EXERCISE OR TERM
WARRANTS AND TO EMPLOYEES BASE PRICE EXPIRATION ------------------
NAME OPTIONS GRANTED (#) DURING THE PERIOD ($ PER SHARE) DATE 5% 10%
---- ------------------- ------------------- ------------- --------- -- ---
<S> <C> <C> <C> <C> <C> <C>
George C. Evans -- -- -- --
Robert D. Idzi 50,000 (1) 10.2 1.26 3/27/06 $39,620 $100,406
Anthony J. 50,000 (1) 10.2 1.25 1/16/06 39,306 99,609
Dellavechia
50,000 (3) 10.2 1.25 1/16/06 39,306 99,609
Joe B. Dorman 25,000 (1) 5.1 1.26 3/27/06 19,810 50,202
25,000 (2) 5.1 1.26 3/27/06 19,810 50,202
Andrew L. Tenney 25,000 (1) 5.1 1.26 3/27/06 19,810 50,202
25,000 (2) 5.1 1.26 3/27/06 19,810 50,202
</TABLE>
- ----------------------
(1) Represents warrants to purchase Common Stock.
(2) Represents options under the Company's 1994 Employee Stock Option Plan
which vest in three equal annual increments following the date of
their grant.
(3) Represents stock options granted before the bankruptcy reorganization
of the Company's subsidiaries which, as a result of the change in
control following the reorganization, are now fully vested.
-6-
<PAGE> 10
The following unexpired warrants and options to purchase Common Stock
were held by the executive officers of the Company listed below at March 31,
1996. None of such executive officers exercised any warrants or options during
the six-month period ended March 31, 1996.
FISCAL YEAR END OPTION AND WARRANT VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN THE MONEY OPTIONS AND WARRANTS
AND WARRANTS AT MARCH 31, 1996 AT MARCH 31, 1996 (1)
-------------------------------------- ---------------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
George C. Evans 1,000,000 -- $290,000 --
Robert D. Idzi 152,000 -- 35,580 --
Anthony J.Dellavechia 125,000 -- 13,125 --
Joe B. Dorman 75,000 25,000 9,000 $3,000
Andrew L. Tenney 75,000 25,000 9,000 3,000
</TABLE>
- --------------------
(1) Calculated using the fair market value of the Common Stock underlying
the options and warrants as of the end of the transition period
($1.38) and the exercise price of the options or warrants.
COMPENSATION OF DIRECTORS
The Company pays to each director a fee of $750 per month and $1,500
per meeting attended, plus reimbursement of expenses in connection with
attending each meeting. In addition, the Company has granted each director
warrants to purchase Common Stock. See "Principal Holders of Capital Stock."
Messrs. Evans and Leary, who are employees of the Company, do not receive
separate compensation for their services as directors, although Mr. Leary was
paid salary and bonus totaling $57,999 during the six-month period ended March
31, 1996.
OTHER AGREEMENTS WITH NAMED EXECUTIVE OFFICERS
Effective January 20, 1995, George C. Evans joined the Company as
President, Chief Executive Officer, Chief Operating Officer and a member of the
Board of Directors by executing a three-year employment agreement, which has
been extended for an additional year, at a minimum annual compensation of
$250,000. Mr. Evans is also to receive a bonus ranging from 25% to 100%, as
determined by the Board, of annual salary. In June 1995, the Board determined
to issue to Mr. Evans options or warrants (to be determined at a later date at
Mr. Evans' option) to purchase 1,500,000 shares of Common Stock at a price of
$1.375 per share. These warrants or options will be issued to Mr. Evans in
500,000 share portions upon the occurrence of the following conditions: (i)
500,000 shares when the Company earns $1 million before taxes and dividends
before fiscal year ending March 31, 1997; (ii) 500,000 shares when the market
price of the Company's Common Stock reaches $3.50 per share; and (iii) 500,000
shares when the market price of the Company's Common Stock reaches $5.00 per
share, subject to adjustment for stock splits, combinations and other similar
events.
As of March 31, 1996, no other executive officer named in the Summary
Compensation Table was covered by an employment agreement.
EMPLOYEE STOCK OPTION PLAN
On August 1, 1994, the Board of Directors adopted, subject to
stockholder approval, the 1994 Employee Stock Option Plan (the "Plan"). The
Plan was approved by the stockholders in May 1995. The purpose of the Plan is
to advance the interest of the Company by providing additional incentives to
attract and retain qualified and competent employees, upon whose efforts and
judgment the success of the Company (including its subsidiaries) is largely
dependent, through the encouragement of stock ownership in the Company by such
persons. A total of 1,750,000 shares of Common Stock (subject to adjustment to
compensate for the issuance of stock dividends or any recapitalization
resulting in a stock split-up, combination or exchange of shares of Common
Stock) have been reserved for sale upon exercise of options granted under the
Plan. Options covering 1,251,500 shares had been granted under the Plan as of
August 6, 1996.
-7-
<PAGE> 11
CASHLESS WARRANTS
The Company also compensates its directors, key employees and some
consultants through grants of cashless warrants. The purposes of these warrant
grants are similar to those of grants under the Plan. The exercise price of
these warrants may be paid by the holder either (i) in cash or (ii) by
surrender of a total number of warrants equal to the fair market value of the
shares being purchased, divided by the excess of the fair market value per
share over the cash exercise price per share. As of August 6, 1996, the
Company had outstanding a total of 1,585,000 of these warrants.
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The Compensation Committee (the "Committee") is comprised of three
non-employee directors: Luther H. Hodges, Jr., Chairman, Susan A. Brown and
Frederick S. Hammer. The Committee regularly reviews the executive
compensation policies and practices of the Company and establishes or approves
the compensation for executive officers. The Committee also administers the
Plan.
The Company's primary objective is to maximize stockholder value. To
aid in accomplishing this goal, the Committee is guided by two principles in
determining executive compensation policies: first, to attract, develop, reward
and retain highly talented individuals; and second, to motivate executive
officers to perform to the best of their abilities and to achieve both
short-term and long-term Company objectives that will contribute to the overall
goal of enhancing stockholder value.
The Company's executive compensation program consists of two main
elements:
o Annual compensation, which is comprised of base
salary and bonus, and
o Long-term incentives that provide a financial
opportunity to executive officers through grants of
stock options and warrants. The compensation that
may be realized by executives through these
incentives is tied directly to the value of the
Company's Common Stock in the future.
The Committee believes that the Company's executive compensation
program reflects the fundamental principles described above and provides strong
incentives to executives to maximize Company performance.
The base salary for Mr. George Evans, Chief Executive Officer, was
determined by direct negotiations with Mr. Evans at the time of his employment
in January 1995. The Employment Agreement for Mr. Evans specified his salary
and the range for his bonus. Of the current Board of Directors, only A. Brean
Murray was a member of the Committee at that time. The other members of the
Board who participated in the negotiations are no longer members of the Board.
During August 1995, the Committee, then composed of Messrs. A. Brean
Murray, Luther H. Hodges, Jr. and James F. Leary, met informally to discuss
Mr. Evans' performance and compensation. In September 1995, the deliberations
of the Committee were presented to the Board of Directors, who approved changes
to Mr. Evans' compensation. Prior to this approval, Mr. Leary, who had been
elected Vice Chairman, resigned from the Compensation Committee.
The Committee and the Board of Directors considered the following
matters: his (i) knowledge of the consumer finance industry; (ii) reputation
and acquaintances with other persons in the finance industry; (iii) performance
in improving Company operations and employee confidence; (iv) performance in
hiring competent and experienced executives which could assist in the
"turnaround" of the Company; (v) performance in formulating and implementing
plans to convert the Company's debt to equity; (vi) performance in dealing with
shareholders and Noteholders who, at the time of his initial employment, were
hostile toward the Company's former management; (vii) performance in settling
the O'Shea shareholder class action litigation; and (viii) performance in
assembling a Board of Directors with experience and knowledge in the finance
industry.
Based on the foregoing evaluation, the Board of Directors, acting on
the recommendation of the Committee, approved an increase in Mr. Evans' salary
from $250,000 to $300,000 and a bonus of $250,000. Mr. Evans received the
bonus in two payments, the first portion of which, consisting of $65,000, was
paid at the end of the fiscal year ended September 30, 1995. The remaining
$185,000 was to be paid subsequent to and conditioned upon confirmation of the
Joint
-8-
<PAGE> 12
Plan. The Board also promised to grant to Mr. Evans the right to receive
warrants or options, at his election, to purchase 1,500,000 shares of Common
Stock, based on the future performance of the Company and its Common Stock per
share price.
The Committee approves the salary of the other executive officers of
the Company, including the executive officers named in the Summary Compensation
Table. The Committee at the end of each fiscal year reviews incentive bonus
awards proposed by Mr. Evans for all of the executive officers other than Mr.
Evans. The Committee and Mr. Evans jointly reviewed the individual
performances of each executive officer other than Mr. Evans, and the Committee
gave significant consideration of Mr. Evans' views on the performance of each
such executive officer. The Committee also awards all warrants and options
under the Plan to executive officers. Again, such awards are generally
proposed by Mr. Evans, and the Committee and Mr. Evans jointly review the
individual performances of each executive officer other than Mr. Evans in
making the awards.
The size of the bonus, option and warrant awards to executive officers
were based on subjective factors, including primarily the perceived importance
of the individual's contribution to the success of the Company and upon the
amount of and value of options and warrants currently held by the individual.
The Committee also takes into consideration in granting options and warrants to
executive officers the relationship of the number of options and warrants held
by each of the executive officers to a subjective rating of the degree of
responsibility of the position held by each officer compared to that of the
other executive officers. While not having a target ownership level of Common
Stock by executive officers, the Committee has endeavored to motivate
executives by granting options at levels that present executives with an
opportunity for significant gains that are commensurate to gains in stockholder
value.
During the transition period ended March 31, 1996, bonus, option and
warrant awards granted to executive employees were tied to the success of the
reorganization of the Company's subsidiaries. Executive officers were granted
a number of options and warrants prior to and during the transition period due
to the Company's need to conserve cash in order to complete the reorganization
of its subsidiaries, while continuing to attract qualified executive employees
notwithstanding the troubled circumstances of the Company.
Stock options and warrants are designed to align the interests of the
recipients with those of the stockholders of the Company. Stock options and
warrants are typically granted by the Company with an exercise price equal to
the market price of the Company's Common Stock on the date of grant. The
options generally vest over three years, and the warrants immediately vest. In
the six-month transition period ended March 1996, the options that were granted
under the Plan prior to the effectiveness of the plan of reorganization of the
Company's subsidiaries became fully vested as a result of the substantial
number of shares of stock that were issued by the Company pursuant to the plan
of reorganization and the resulting deemed change in control of the Company.
In summary, the Committee's executive compensation decisions are
generally intended to link a significant portion of the compensation of the
Company's executive officers to individual performance and to corporate
performance and stock price appreciation. The Committee intends to continue
the policy of linking executive compensation to corporate performance and
improvement in stockholder value, recognizing that economic factors beyond
management's control may result in imbalances for a particular period but that
consistent improvement in corporate performance over the long-term will enure
to the mutual benefit of the Company's executives and its stockholders.
-9-
<PAGE> 13
The Compensation Committee of the Board of Directors:
Luther H. Hodges, Jr. - Chairman (member from September 6, 1995 to
present);
Richard F. Bonini (member from June 29, 1995 to August 8, 1996);
William H. T. Bush (member from January 25, 1996 to August 8, 1996);
James F. Leary (member from June 29, 1995 to September 6, 1995);
A. Brean Murray (member from June 29, 1995 to January 25, 1996);
Susan A. Brown (member from August 8, 1996 to present);
Frederick S. Hammer (member from August 8, 1996 to present).
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors established the Committee in September 1993.
During the six-month period ended March 31, 1996, the Company paid Brean
Murray, Foster Securities Inc. ("BMFS") $200,000 for services rendered by it
related to the success of the plan of reorganization of the Company's
subsidiaries. A. Brean Murray is the chairman of BMFS and served on the
Committee from June 29, 1995 until January 25, 1996. For a listing of the
members of the Committee during the six-month period ended March 31, 1996, see
"Report of the Compensation Committee on Executive Compensation" above. Mr.
James F. Leary resigned as a member of the Committee upon his employment by the
Company in September 1995, at which time he was appointed Vice Chairman-Finance
of the Company.
PERFORMANCE GRAPH
The following graph presents cumulative stockholder return on the
Company's Common Stock for the two and one- half years ended March 31, 1996.
The Company is compared to the S&P 500 Index and the S&P Financial Index. The
graph assumes that $100 was invested in the Company's Common Stock and in each
index at the beginning of the measurement period.
The data source for all graphs is Bloomberg data service and National
Quotation Bureau.
COMPARISON OF CUMULATIVE TOTAL RETURN 1993-1996*
<TABLE>
<CAPTION>
SEPTEMBER 30, 1993 SEPTEMBER 30, 1994 SEPTEMBER 30, 1995 MARCH 31, 1996
------------------ ------------------ ------------------ --------------
<S> <C> <C> <C> <C>
Search Common Stock $ 100.00 $ 76.17 $ 18.89 $ 34.12
S&P 500 $ 100.00 $ 100.82 $ 127.34 $ 153.96
S&P Financials $ 100.00 $ 89.91 $ 123.71 $ 154.82
</TABLE>
- --------------------------
* Assumes the reinvestment of any dividends. Due to the sporadic and
limited trading of the Company's Common Stock before September 30,
1993, only two and one-half years are shown.
-10-
<PAGE> 14
INCREASE IN NUMBER OF SHARES RESERVED FOR
THE 1994 EMPLOYEE STOCK OPTION PLAN
In August 1994, the Board of Directors of the Company adopted, subject
to stockholder approval, the 1994 Employee Stock Option Plan (the "Plan"). The
Plan was approved by the stockholders of the Company in May 1995. The Board of
Directors proposes to increase the maximum number of shares of the Company's
Common Stock reserved for issuance upon the exercise of options granted under
the Plan from 1,750,000 to 5,000,000. The maximum number of shares is subject
to appropriate adjustments upon stock dividends or recapitalizations resulting
in a stock split-up, combination or exchange of shares of the Company's Common
Stock. If the proposed one-for-eight "reverse" stock split is approved, the
current and proposed maximum numbers of shares of the Common Stock reserved for
issuance under the Plan would be 218,750 and 625,000, respectively. The
proposed stockholder resolution to approve the necessary amendment to the Plan
is set forth in full on Exhibit A to this Proxy Statement.
DESCRIPTION OF THE 1994 EMPLOYEE STOCK OPTION PLAN
Purpose. The purpose of the Plan is to advance the interest of the
Company by providing additional incentives to attract and retain qualified and
competent employees, upon whose efforts and judgment the success of the Company
(including its subsidiaries) is largely dependent, through the encouragement of
stock ownership in the Company by such persons. Unless the context otherwise
requires, references to the Company shall mean Search Capital Group, Inc. and
any corporation wherein the Company owns, directly or indirectly, 50% or more
of the total combined voting power (a "Subsidiary").
Eligibility. Those persons who are employees of the Company or
directors of a Subsidiary, but excluding directors of the Company who are not
employees of the Company, are eligible to participate in the Plan. As of
August 1, 1996, approximately 100 persons were eligible for options under the
Plan.
Types of Options. The Plan authorizes the granting of incentive stock
options ("1994 Incentive Options") and nonqualified stock options ("1994
Employee Nonqualified Options") to purchase Common Stock to eligible employees
of the Company. Unless the context otherwise requires, the term "1994 Employee
Option" includes both 1994 Incentive Options and 1994 Employee Nonqualified
Options.
Administration. The Plan is administered by the Compensation
Committee of the Board of Directors of the Company (the "1994 Employee Plan
Administrator"). The 1994 Employee Plan Administrator must consist of at least
two members of the Board of Directors, all of whom must be "disinterested
persons." Under the Plan, a disinterested person is one who is not eligible at
the time he or she exercises discretion in administering the Plan and has not
at any time within one year prior thereto been eligible for selection as a
person to whom shares of Common Stock, stock options or stock appreciation
rights may be granted pursuant to the Plan or any other plan of the Company in
which administrators of such plan use discretion in granting stock options or
stock appreciation rights. The 1994 Employee Plan Administrator in its sole
discretion shall determine the employees to be awarded 1994 Employee Options,
the number of shares subject thereto and the exercise price thereof, subject to
certain limitations. In addition, the determinations and the interpretation
and construction of any provision of the Plan by the 1994 Employee Plan
Administrator shall be final and conclusive.
Granting of 1994 Employee Options. The 1994 Employee Plan
Administrator has granted, through August 6, 1996, 1994 Employee Options to the
following persons to purchase the number of shares of Common Stock indicated.
-11-
<PAGE> 15
NEW PLAN BENEFITS
1994 EMPLOYEE STOCK OPTION PLAN
<TABLE>
<CAPTION>
Name and Position No. of Shares Exercise Price Per Share ($) Expiration Date
- ----------------- ------------- ---------------------------- ---------------
<S> <C> <C> <C>
Executive Officers:
George C. Evans 500,000 $1.09 1/20/2005
President, Chief Executive Officer,
Director
Robert D. Idzi 102,000 1.09 1/15/2005
Senior Vice President, Chief
Financial Officer, Treasurer
Anthony J. Dellavechia 50,000 1.25 1/16/2006
Senior Executive Vice President,
Operations Director
Joe B. Dorman 25,000 1.09 2/20/2005
Senior Vice President, General 25,000 1.26 3/27/2006
Counsel and Secretary
Andrew L. Tenney 25,000 1.09 1/23/2005
Executive Vice President, 25,000 1.26 3/27/2006
Operations Director
All current executive officers 870,500
(as a group)
All current directors who are not 0
executive officers (as a group)
All employees, including all current 281,000
officers who are not executive officers
(as a group)
</TABLE>
As of August 6, 1996, the closing trading price for the Common Stock was $0.84
per share.
Exercise Price of 1994 Employee Options. The 1994 Incentive Options
may not be granted with an exercise price per share that is less than the fair
market value of the Common Stock at the date of grant. The 1994 Employee
Nonqualified Options may be granted with any exercise price determined by the
1994 Employee Plan Administrator.
Payment of Exercise Price. The exercise price of a 1994 Employee
Option may be paid in cash, certified or cashier's check, by money order,
personal check or delivery of already owned shares of Common Stock having a
fair market value equal to the exercise price, or by delivery of a combination
of cash and already owned shares of Common Stock; provided, however, that if
the optionee acquired such stock directly or indirectly from the Company, he or
she shall have owned such stock to be surrendered for six months prior to
tendering such stock for the exercise of a 1994 Employee Option. One purpose
for permitting delivery of Common Stock in full or partial payment of the
exercise price is to make it possible for the optionee to exercise his or her
1994 Employee Option without the need for the sale of Common Stock already
owned, which sale could result in incurring capital gain (or loss) for federal
income tax purposes or potential liability under Section 16 of the Securities
Exchange Act as of 1934, as amended (the "Exchange Act").
-12-
<PAGE> 16
Special Provisions for 1994 Incentive Stock Options. An employee may
receive more than one 1994 Incentive Option, but the maximum aggregate fair
market value of the Common Stock (determined when the 1994 Incentive Options
were granted) with respect to which 1994 Incentive Options are first
exercisable by such employee in any calendar year cannot exceed $100,000. In
addition, no 1994 Incentive Option may be granted to an employee owning
directly or indirectly stock possessing more than 10% of the total combined
voting power of all classes of stock of the Company unless the exercise price
is set at not less than 110% of the fair market value of the shares subject to
such 1994 Incentive Option on the date of grant and such 1994 Incentive Option
expires not later than five (5) years from the date of grant. Awards of 1994
Employee Nonqualified Options are not subject to these special limitations.
Transferability of 1994 Employee Options. No 1994 Employee Option is
assignable or transferable otherwise than by will or by the laws of decent and
distribution. During the lifetime of an optionee, his or her 1994 Employee
Option is exercisable only by the optionee or his or her guardian or legal
representative.
Exercise of 1994 Employee Options. The 1994 Employee Plan
Administrator, in its sole discretion, may limit an optionee's right to
exercise all or any portion of a 1994 Employee Option until one or more dates
subsequent to the date of grant. The 1994 Employee Plan Administrator also has
the right, exercisable in its sole discretion, to accelerate the date on which
all or any portion of a 1994 Employee Option may be exercised.
The Plan provides that thirty days prior to certain major corporate
events such as, among other things, certain changes in control, mergers or
sales of substantially all of the assets of the Company (a "Major Corporate
Event"), each 1994 Employee Option shall immediately become exercisable in
full.
Expiration of 1994 Employee Options. The expiration date of a 1994
Employee Option will be determined by the 1994 Employee Plan Administrator at
the time of the grant, but in no event will a 1994 Employee Option be
exercisable after the expiration of ten (10) years from the date of grant of
the 1994 Employee Option.
If an optionee's employment is terminated for cause, all rights of
such optionee under the Plan cease and the 1994 Employee Options granted to
such optionee become null and void for all purposes. The Plan further provides
that, in most instances, a 1994 Employee Option must be exercised by the
optionee within thirty (30) days after the termination of the optionee's
employment with the Company (for any reason other than termination for cause,
mental or physical disability or death) if and to the extent such 1994 Employee
Option was exercisable on the date of such termination. If the optionee is not
otherwise employed by the Company, his or her 1994 Employee Option must be
exercised within thirty (30) days of the date he or she ceases to be a director
of a Subsidiary or one (1) year after such date if the optionee shall die.
Generally, if an optionee's termination of employment is due to mental
or physical disability, the optionee will have the right to exercise the 1994
Employee Option (to the extent otherwise exercisable on the date of
termination) for a period of one year from the date on which the optionee
suffers the mental or physical disability. If an optionee dies while actively
employed by the Company, the 1994 Employee Option may be exercised (to the
extent otherwise exercisable on the date of death) within one year of the date
of the optionee's death by the optionee's legal representative or legatee.
As described above, a 1994 Employee Option becomes exercisable in full
thirty (30) days prior to a Major Corporate Event. In anticipation of a Major
Corporate Event, however, the 1994 Employee Plan Administrator may, after
notice to the optionee, cancel the optionee's 1994 Employee Options on the
consummation of the Major Corporate Event. The optionee, in any event, will
have the opportunity to exercise his or her 1994 Employee Options in full prior
to such Major Corporate Event.
Expiration of the 1994 Employee Plan. The Plan will expire on July
31, 2004 and any 1994 Employee Option outstanding on such date will remain
outstanding until it has either expired or has been fully exercised.
Adjustments. The Plan provides for adjustments to the number of
shares for which 1994 Employee Options may be granted, to the number of shares
subject to outstanding 1994 Employee Options and to the exercise prices of such
outstanding 1994 Employee Options in the event of a declaration of a stock
dividend or any recapitalization resulting in a stock split-up, combination or
exchange of shares of Common Stock.
-13-
<PAGE> 17
Amendments. The 1994 Employee Plan Administrator may amend, suspend
or terminate the Plan or any 1994 Employee Option at any time subject to
stockholder approval in certain instances, provided that such action may not
substantially impair the rights of an optionee under an outstanding 1994
Employee Option without the optionee's written consent. The 1994 Employee Plan
Administrator may not amend the Plan without further stockholder approval to
increase the number of shares of Common Stock reserved for issuance, to change
the class of employees eligible to participate in the Plan, to permit the
granting of 1994 Employee Options with more than a ten-year term or to extend
the termination date of the Plan.
Stockholder Approval. Approval by the stockholders of the Company of
the proposed amendment to the Plan to increase the number of shares of Common
Stock reserved for issuance is required by the terms of the Plan and as a
condition to continued qualification of 1994 Incentive Options as such under
the Internal Revenue Code of 1986, as amended (the "Code").
FEDERAL INCOME TAX CONSEQUENCES
The following paragraphs contain a summary of certain federal income
tax consequences associated with the 1994 Employee Options. This summary is
based on current provisions of the Code, and the regulations, rulings and
decisions currently in effect, all of which are subject to change. This
summary is not a complete analysis of the potential tax considerations, and
does not discuss all aspects of federal income taxation that may be relevant to
the Company or a particular optionee. Moreover, no information is provided
with respect to the consequences of any applicable state, local or foreign tax
laws. Each optionee should consult his or her own tax advisor to determine his
or her actual tax consequences attributable to 1994 Employee Options.
1994 Incentive Options. Generally, there will be no federal income
tax consequences to either an optionee or the Company as a result of the grant
of a 1994 Incentive Option. The exercise by an optionee of a 1994 Incentive
Option also will not result in any federal income tax consequences to the
Company or an optionee, except that an amount equal to the excess of the fair
market value of the shares acquired upon exercise of a 1994 Incentive Option,
determined at the time of exercise, over the amount paid for the shares by the
optionee will be includable in the optionee's alternative minimum taxable
income for purposes of the alternative minimum tax. If an optionee disposes of
the shares acquired upon exercise of a 1994 Incentive Option, the federal
income tax consequences will depend upon the optionee's holding period for such
shares. If the optionee does not dispose of the shares within two years after
the 1994 Incentive Option was granted, nor within one year after the optionee
exercised the 1994 Incentive Option, then the optionee will recognize a
long-term capital gain or loss (assuming such shares were held as a capital
asset by the optionee). The amount of the long-term capital gain or loss will
be equal to the difference between (i) the amount the optionee realized on the
disposition of the shares and (ii) the optionee's adjusted tax basis in such
shares (generally the option price at which the optionee acquired the shares).
The Company is not entitled to any deduction under these circumstances. If the
optionee does not satisfy both of the above holding period requirements (a
"disqualifying disposition"), then the optionee will be required to recognize
as ordinary compensation income, in the year the optionee disposes of the
shares, the lesser of (i) the "bargain element" in the 1994 Incentive Option at
the time of its exercise (i.e., the excess of the fair market value of the
shares over the option price), or (ii) the gain realized on the disposition of
the shares. The Company will ordinarily be entitled to a compensation expense
deduction in an amount equal to the ordinary income includable in the taxable
income of the optionee. This compensation income may be subject to
withholding. The remainder of the gain recognized on the disposition, if any,
or any loss recognized on the disposition, will be treated as long-term or
short-term capital gain or loss, depending on the holding period (assuming such
shares were held as a capital asset by the optionee) and will not result in any
deduction by the Company.
1994 Employee Nonqualified Options. Neither the optionee nor the
Company incurs any federal income tax consequences as a result of the grant of
a 1994 Employee Nonqualified Option. Upon exercise of a 1994 Employee,
Nonqualified Option, an optionee will generally recognize ordinary income,
subject to withholding, on the exercise date in an amount equal to the
difference between (i) the fair market value of the shares purchased,
determined on the exercise date, and (ii) the consideration paid for the
shares. The optionee's tax basis in the acquired stock will be equal to the
fair market value of such shares. At the time of a subsequent sale or
disposition of any shares of Common Stock obtained upon exercise of a 1994
Employee Nonqualified Option, any appreciation (or depreciation) after the date
of exercise will be treated as either a capital gain or loss (assuming such
shares were held as a capital asset by the optionee). Such capital gain or
loss will be long-term capital gain or loss if the sale or disposition occurs
more than one year after the exercise date and short-term capital gain or loss
if the sale or disposition occurs one year or less after the exercise date. In
general, the Company
-14-
<PAGE> 18
will be entitled to a compensation expense deduction in connection with the
exercise of a 1994 Employee Nonqualified Option for any amounts includable in
the taxable income of the optionee as ordinary income, provided the Company
complies with any applicable withholding requirements.
PURPOSE AND EFFECT OF INCREASING THE NUMBER OF SHARES RESERVED FOR THE PLAN
The Board of Directors believes that, with the Company's potential
growth, it will be necessary for the Company to hire additional qualified and
competent personnel. The Company believes that the Plan is serving its purpose
in helping to attract, retain and reward qualified and competent personnel and
in strengthening the commonality of interest between such personnel and the
shareholders of the Company.
The Board believes that the Plan has contributed to the progress of
the Company by providing incentives to its personnel. Intense competition
among business firms for qualified and competent personnel makes it important
to the Company to maintain an effective compensation program in order to
continue to attract, motivate and retain persons necessary to further the
Company's growth. Competing compensation programs of other companies make it
important that the Company's program continues and has sufficient flexibility.
The Board believes that the Plan, as supplemented with additional shares, will
continue to assist the Company in meeting the competitive situation created by
the varied compensation programs of other companies.
The Board believes that the addition of needed personnel may require
issuance of options to purchase more shares than are currently reserved for
issuance under the Plan. As of August 6, 1996, 1994 Employee Options had been
granted to purchase all but 498,500 of the shares reserved for the Plan. The
Board of Directors believes that the Company should not be prevented from
issuing 1994 Employee Options for this purpose due to the limited number of
available shares under the Plan.
In addition, as discussed above under "Executive Compensation--Other
Agreements With Named Executive Officers," the Board of Directors has
determined to issue to George Evans either warrants or 1994 Employee Options to
purchase 1,500,000 shares of Common Stock. Mr. Evans has the right to
determine whether to receive 1994 Employee Options or warrants. If Mr. Evans
were to choose 1994 Employee Options, there would not be sufficient shares of
Common Stock available under the Plan to accommodate his choice. The Board
believes that the Plan should be amended to accommodate such options.
The Board of Directors believes that the increase from 1,750,000
shares to 5,000,000 shares of Common Stock reserved for issuance under the Plan
should be sufficient to cover the anticipated needs of the Company for new
option grants. If the proposed one-for-eight "reverse" stock split is approved
by the shareholders, the current and proposed numbers of shares of Common Stock
reserved for issuance under the Plan would be 218,750 and 625,000,
respectively.
In addition to making more option grants available under the Plan, a
principal effect of the proposed increase would be to reduce the number of
unissued shares of Common Stock available to be issued for other purposes. The
Board believes that the Company has available sufficient authorized and
unissued or unreserved shares to cover the anticipated needs of the Company for
such shares.
The proceeds received by the Company from the sale of stock pursuant
to 1994 Employee Options will be used for the general purposes of the Company,
or in the case of the receipt of payment in shares of Common Stock, as the
Board of Directors may determine, including redelivery of the shares received
upon exercise of options.
The Board believes that increasing the number of shares of the
Company's Common Stock for which 1994 Employee Options may be granted under the
Plan is in the best interests of the Company and its stockholders.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS
VOTE FOR ADOPTION OF THE PROPOSED INCREASE IN THE SHARES RESERVED FOR THE PLAN.
-15-
<PAGE> 19
CLARIFYING AMENDMENTS TO TERMS OF
9%/7% CONVERTIBLE PREFERRED STOCK
At the special meeting, the stockholders will be asked to approve
certain clarifying amendments to the Company's Certificate of Designation for
the New Preferred Stock. The proposed stockholder resolution to approve the
amendments is set forth in full on Exhibit B attached to this Proxy Statement.
PURPOSE
The proposed amendments are needed to enable the Company to issue
shares of the New Preferred Stock in future acquisitions or stock offerings.
The terms of the New Preferred Stock were determined for the purpose of their
issuance by the Company in March 1996 pursuant to the Third Amended Joint Plan
of Reorganization (the "Reorganization Plan") for eight of the Company's
subsidiaries in their Chapter 11 bankruptcy proceedings. These terms are set
forth in the Certificate of Designation for the New Preferred Stock, which
constitutes a part of the Company's Restated Certificate of Incorporation. The
Company was a co-proponent of the Reorganization Plan. Because the New
Preferred Stock was intended for issuance pursuant to the Reorganization Plan,
the terms of the New Preferred Stock in the Certificate of Designation contain
references to the Reorganization Plan and other provisions that are not
intended for other purposes.
In pursuit of the Company's growth plans, the Company has reached
agreements with certain companies concerning acquisitions of motor vehicle
receivables. See the discussion under "Recent and Future Acquisitions" below.
The consummation of the Company's acquisition of the assets of U.S. Lending
Corporation ("USLC") is conditioned on the approval of the proposed clarifying
amendments to the terms of the New Preferred Stock. In connection with the
Company's acquisition of the assets of Dealers Alliance Credit Corp. ("DACC"),
the Company issued shares of Series B Preferred Stock, which will be
automatically converted into shares of New Preferred Stock upon the
effectiveness of the proposed clarifying amendments. Both USLC and DACC desire
to obtain shares of the New Preferred Stock because an over- the-counter
trading market has developed for the New Preferred Stock. One of the
provisions of the Reorganization Plan prohibits the Company from issuing shares
of convertible preferred stock which are senior in rights to the New Preferred
Stock (except that such convertible preferred stock may carry the then current
market interest rate, which may be higher or lower than that of the New
Preferred Stock). To comply with the prohibition in the Reorganization Plan
against issuance of additional series of preferred stock having rights senior
to the New Preferred Stock, the Company would like to issue shares of New
Preferred Stock rather than another series of preferred stock in other future
acquisition transactions if they occur. However, the Company will be prevented
from doing that due to certain existing ambiguities in the terms of the New
Preferred Stock and the provisions of the New Preferred Stock designed for the
particular purpose of the Reorganization Plan.
Accordingly, the proposed amendments are intended to clarify certain
ambiguities in, and to supplement the terms of, the Certificate of Designation
to enable the Company to issue shares of New Preferred Stock, on acceptable
terms, to new purchasers in stock offerings and to sellers in acquisition
transactions. Because of the existence of the public trading market for the
New Preferred Stock, shares of that series should have a higher value than
shares of a new, different series of preferred stock which has no public
trading market. Accordingly, such shares should be more attractive to
investors and sellers in acquisitions.
EFFECTS
The principal effects of the proposed amendments to the Certificate of
Designation are summarized as follows:
Dividend Record Dates. The proposed amendments clarify and resolve an
ambiguity as to the record date for purposes of determining which stockholders
are entitled to receive quarterly dividends on the New Preferred Stock. The
proposed amendments provide that the record date for such purposes is the close
of business on the last day of the calendar quarter.
Effective Date. As currently written, the Certificate of Designation
fails to define the term "Effective Date," although it is used in several
places in the Certificate of Designation. The proposed amendments define the
term "Effective Date," in conformity with the intent of the Reorganization
Plan, to be the effective date of the Reorganization Plan, which was March 15,
1996.
-16-
<PAGE> 20
End Date. The proposed amendment seeks to clarify the period during
which the holders of the New Preferred Stock are entitled to receive dividends
at a rate of $0.315 per share. As currently written, the Certificate of
Designation provides that the right to receive dividends at the $0.315 rate
terminates at "the end of the 12th full calendar quarter following payment of
the first dividend". The first dividend payment on the New Preferred Stock was
set aside for payment on the Effective Date. The proposed amendment clarifies
these provisions by specifying that March 31, 1999 is the precise date upon
which the right to receive such dividends terminates (i.e., the End Date).
That date is the end of 12 full calendar quarters after the Effective Date.
Shareholders Entitled to Retroactive Payment of Dividends. The
proposed amendments clarify and resolve an ambiguity with respect to the
commencement date for the accrual of dividends on the New Preferred Stock. As
currently written, the Certificate of Designation could be construed to entitle
all holders of such stock, regardless of when their shares were issued, to
receive dividends for the period beginning July 1, 1995 through the Effective
Date. The proposed amendments clarify that (i) only those holders who were
issued stock pursuant to the Reorganization Plan were entitled to the
retroactive payment of dividends for the period from July 1, 1995 through the
Effective Date, and (ii) dividends on each share of New Preferred Stock not
issued pursuant to the Reorganization Plan shall begin to accrue on the date
such shares are issued. The amendments also clarify that after the first
retroactive dividend payment, the next dividend payment would be for the period
from the Effective Date through the end of the next full calendar quarter.
This result can be inferred from, but is not clear in, the existing language.
Percentage References. The proposed amendments clarify certain
percentage references in the dividend provisions (i.e., "9%" and "7%") by
indicating that such references are percentages of the $3.50 liquidation
preference for the New Preferred Stock.
Conditions for Class Vote on Merger. The existing terms provide that
the affirmative vote or consent of holders of at least 50% of all outstanding
shares of New Preferred Stock is necessary for the Company to merge with
another company when thereafter the Company is not the controlling entity. The
reference to "controlling entity" is ambiguous. The proposed amendments
clarify this standard by specifying that the members of the Board of Directors
of the Company immediately preceding the merger must be a majority of the
members of the board of directors of the company surviving the merger, whether
it is the Company or another company, for the 50% vote requirement not to
apply.
Mandatory Conversion. The existing terms provide that (i) the Company
has the option, if a certain trigger trading price for the Common Stock is
reached, to mandatorily convert up to 50% of the shares of the New Preferred
Stock issued on the Effective Date into shares of Common Stock, and (ii) all
unconverted New Preferred Stock will be mandatorily converted on the seventh
anniversary of the Effective Date. The proposed amendments supplement and
clarify these terms by adding provisions that address (i) the method of
selecting the 50% of the shares to be converted, (ii) the manner in which
notice of the conversion is to be provided, (iii) the content of such notice,
and (iv) the manner in which certificates of the New Preferred Stock are to be
exchanged for certificates of the underlying Common Stock. To enable the New
Preferred Stock to be used for purposes other than the Reorganization Plan, the
amendments would clarify that the 50% mandatory conversion is not limited to
those shares issued on the Effective Date so that the Company could mandatorily
convert up to 50% of all outstanding shares, whenever they were issued. The
proposed amendments further provide that after the effective date of the
conversion (i) the accrual of dividends upon the converted New Preferred Stock
shall cease and (ii) all rights of holders of such stock shall cease, except
for the right to receive shares of the Common Stock and accrued, unpaid
dividends. The proposed amendments also clarify (i) the conversion rate for
the New Preferred Stock upon the final mandatory conversion on the seventh
anniversary of the Effective Date, in accordance with the intent of the
existing provisions, and (ii) that the conversion rate for the final mandatory
conversion and the trigger prices per share for the initial 50% mandatory
conversion are subject to adjustment if and when the normal two- for-one
conversion rate for the New Preferred Stock is adjusted for extraordinary
transactions, such as stock splits or combinations, as inferred from the
existing provisions.
Conversion Date. The existing terms of the New Preferred Stock
contain a defined term "Conversion Date" that might be interpreted to reference
either the final mandatory conversion of all the New Preferred Stock on the
seventh anniversary of the Effective Date or the prior mandatory conversion, at
the Company's option, of 50% of the New Preferred Stock. The amendments would
eliminate the use of this term since it was generally not necessary. In the
few instances where continued use of that term or a similar term is necessary,
a reference to the "seventh anniversary of the Effective Date" would be
substituted, which conforms with the intent of the Reorganization Plan.
-17-
<PAGE> 21
Effective Dates of Mandatory Conversions. The existing provisions
state variously that the final conversion of all issued New Preferred Stock
occurs on the seventh anniversary of the Effective Date or that the effective
date of the conversion is a date established by the Board of Directors or the
date of mailing of the notice of the final conversion. The proposed amendments
clarify that the effective date of the final mandatory conversion is the
seventh anniversary of the Effective Date. The proposed amendments also cure
an ambiguity as to whether the Board may establish an effective date for the
initial 50% mandatory conversion by clarifying that it may do so.
Accrued Unpaid Dividends. The proposed amendments clarify that the
Company must pay through the date of conversion any accrued, unpaid dividends
on any New Preferred Stock that is mandatorily converted. The existing terms
have provisions to that effect, but are unclear as to whether they apply to both
the initial 50% and the final mandatory conversions.
Market Price; Value of Common Stock Dividend. Several provisions in
the existing Certificate of Designation are dependent on the market price or
average market price of the Common Stock, but fail to contain adequate
definitions of those terms. The proposed amendments clarify by providing
suitable and consistent definitions of these terms. The amendments also add
provisions specifying how the Common Stock should be valued for purposes of any
dividend payable in shares of Common Stock on the New Preferred Stock in a
manner consistent with the implications of the existing provisions. The new
provisions specify that the Common Stock dividend value will be based on the
average market price of the Common Stock for the 20 trading-day period ending
five days prior to the dividend payment date.
Mandatory Conversion of Series B Preferred Stock. The terms of the
Series B Preferred Stock specify that all outstanding shares of that series
will be automatically converted, on a one-for-one ratio, into shares of New
Preferred Stock upon the filing with the Delaware Secretary of State of the
proposed clarifying amendments to the terms of the New Preferred Stock.
Accordingly, upon such filing, 2,554,060 additional shares of New Preferred
Stock will be issued in full conversion of the outstanding shares of Series B
Preferred Stock. The outstanding shares of Series B Preferred Stock were
issued in connection with Company's acquisition of the assets of DACC. See
"Recent and Future Acquisitions."
RECOMMENDATION AND REQUIRED VOTE
The Board believes the adoption of the amendments to the Certificate
of Designation for the New Preferred Stock to be in the best interests of the
Company and its shareholders. The Board does not believe that the proposed
amendments will have any material adverse effects on the shares of New
Preferred Stock issued pursuant to the Reorganization Plan.
Approval of the proposed clarifying amendments to the terms of the New
Preferred Stock requires the affirmative vote of a majority of all of the
outstanding shares of Common Stock, 12% Preferred Stock, Series B Common Stock
and New Preferred Stock, voting together as a single class, as well as the
affirmative vote of two-thirds of all of the outstanding shares of New
Preferred Stock, voting as a separate class.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS
VOTE FOR ADOPTION OF THE CLARIFYING AMENDMENTS TO THE TERMS OF THE NEW
PREFERRED STOCK.
------------------------------
AMENDMENTS TO THE RESTATED CERTIFICATE
OF INCORPORATION TO AUTHORIZE A REVERSE STOCK SPLIT
The Board of Directors has proposed the following amendments (the
"Reverse Split Amendments") to the Company's Restated Certificate of
Incorporation: (i) amendments to Paragraph FOURTH that would effect a reverse
split of the Company's Common Stock on the basis of one new share of Common
Stock for each eight shares of presently outstanding Common Stock and one new
share of Preferred Stock for each eight shares of presently outstanding
Preferred Stock (the "Reverse Stock Split"), and (ii) related amendments
required by the Reverse Stock Split to the terms of the New Preferred Stock,
Series B Preferred Stock and 12% Preferred Stock that would effect
proportionate increases in the dividend rates and liquidation preferences per
share of the 12% Preferred Stock and New Preferred Stock and in the average
trading prices for the Common Stock that are a condition to the Company's right
to pay dividends in shares of Common Stock on the New Preferred Stock and
Series B Preferred Stock and that trigger the Company's redemption and
mandatory conversion
-18-
<PAGE> 22
rights as to the 12% Preferred Stock and the Company's mandatory conversion
rights as to the New Preferred Stock and Series B Preferred Stock (the
"Preferred Stock Amendments").
As of August 16, 1996, 27,521,563 shares of Common Stock were issued
and outstanding, 3,026,389 shares were held in treasury and 99,451,948 shares
were unissued. As of the same date, there were an aggregate of 67,238,170
shares of Common Stock reserved for issuance under the Plan and upon the
exercise of outstanding warrants and the conversion of outstanding shares of
Preferred Stock. The proposed stockholder resolution to approve the Reverse
Split Amendments is set forth in full on Exhibit C to this Proxy Statement.
PURPOSES
The primary purpose of the Reverse Split Amendments is to reduce the
number of shares of Common Stock and New Preferred Stock outstanding and
thereby increase the market prices per share of the Common Stock and New
Preferred Stock in order to make the Common Stock and New Preferred Stock
eligible for quotation on The Nasdaq Stock Market ("NASDAQ") and to meet the
margin requirements for over-the-counter stock. NASDAQ requires that stock
have a minimum bid price of $3.00 per share at the time of its initial
quotation, if the Company satisfies certain market capitalization and other
requirements. Federal Reserve Board regulations specify that an
over-the-counter stock must have a minimum average bid price of at least $5.00
per share, in addition to satisfying certain other requirements, to enable
broker/dealers, banks and certain other lenders to provide margin loans secured
by the Company's stock. As of August 6, 1996, the closing bid prices of the
Common Stock and New Preferred Stock were $0.81 and $2.00 per share,
respectively, and the closing asked prices were $0.88 and $2.38 per share,
respectively. There can be no assurance that the prices of the Common Stock
and New Preferred Stock after the Reverse Stock Split will actually increase in
an amount proportionate to the decrease in the number of outstanding shares,
that such prices will exceed the minimum bid prices required by NASDAQ or the
Federal Reserve Board or that the Company will continue to meet the other
requirements for quotation on NASDAQ.
In addition, the Board of Directors believes that the present levels
of per share market prices of the Common Stock and New Preferred Stock impair
the acceptability of the stock by portions of the financial community and the
investing public. Theoretically, the number of shares outstanding should not,
by itself, affect the marketability of the stock, the type of investor who
acquires it or a company's reputation in the financial community, but in
practice this is not necessarily the case, as many investors look upon low
priced stock as unduly speculative in nature and, as a matter of policy, avoid
investment in such stocks. The Board of Directors also believes that the
current per share prices of the Common Stock and New Preferred Stock have
reduced the effective marketability of the shares because of the reluctance of
many leading brokerage firms to recommend low priced stocks to their clients.
Further, various brokerage house policies and practices tend to discourage
individual brokers from dealing in low priced stocks. Some of these policies
and practices pertain to the payment of brokers' commissions and to
time-consuming procedures which function to make the handling of low priced
stocks unattractive to brokers from an economic standpoint. In addition, the
structure of trading commissions also tends to have an adverse impact upon
holders of low priced stock because the brokerage commission on a sale of low
priced stock generally represents a higher percentage of the sales price than
the commission on higher priced issues.
PRINCIPAL EFFECTS
The principal effects of the proposed Reverse Split Amendments would
be the following:
Based upon 27,521,563 shares of Common Stock, 16,952,594 shares of New
Preferred Stock, 2,554,060 shares of Series B Preferred Stock and 400,000
shares of 12% Preferred Stock outstanding on August 16, 1996, the proposed
one- for-eight Reverse Stock Split would decrease the outstanding shares of
each of the Common Stock, New Preferred Stock, Series B Preferred Stock and 12%
Preferred Stock by 87.5%, and thereafter approximately 3,440,195 shares of
Common Stock, 2,122,893 shares of New Preferred Stock, 319,257 shares of Series
B Preferred Stock and 50,000 shares of 12% Preferred Stock would be outstanding
and held of record by approximately 3,595 holders of the Common Stock, 2,020
holders of the New Preferred Stock, four holders of the Series B Preferred
Stock and 86 holders of the 12% Preferred Stock. The proposed Reverse Split
Amendments would not affect the proportionate equity interest in the Company of
any holder of Common Stock or Preferred Stock, except as may result from the
provisions for the elimination of fractional shares as described below. The
proposed Reverse Split Amendments will not affect the number of authorized
shares of Common Stock and Preferred Stock, the conversion rates of any of the
Preferred Stock or the registration of the Common Stock or New Preferred Stock
under the Exchange Act.
-19-
<PAGE> 23
The Reverse Stock Split may leave certain stockholders with one or
more "odd lots" of the Company's Common Stock or Preferred Stock, i.e., stock
in amounts of less than 100 shares. These shares may be more difficult to
sell, or require a greater commission per share to sell, than shares in amounts
of 100 or more.
As of August 6, 1996, there were outstanding warrants and 1994
Employee Options to purchase an aggregate of 7,819,708 shares of Common Stock.
On that date, options to purchase 498,500 shares of Common Stock remained
available for grant under the Plan. All of the outstanding warrants and 1994
Employee Options include provisions for adjustments in the number of shares
covered thereby in the event of a Reverse Stock Split. If the proposed Reverse
Split Amendments are approved and effected, there would be reserved for
issuance upon exercise of all outstanding warrants and options a total of
977,463 shares of Common Stock. Each of the outstanding warrants and options
would thereafter evidence the right to purchase 12.5% of the shares of Common
Stock previously covered thereby and the exercise price per share would be
eight times the previous exercise price. The number of shares available for
grant under the Plan would be decreased to approximately 218,750 shares of
Common Stock (or 625,000 shares if the separate proposal herein to increase the
number of shares covered by the Plan is approved by the stockholders).
The terms of the New Preferred Stock and the Series B Preferred Stock
currently provide that the Company has the rights (i) to mandatorily convert up
to 50% of the outstanding shares of New Preferred Stock if Common Stock trading
prices exceed $4.25 between March 15, 1998 and March 15, 1999 or $3.50
thereafter, and (ii) to make dividend payments in the form of shares of Common
Stock, under certain circumstances, if the average trading price of the Common
Stock exceeds $0.50 per share for the 20 days ending five days prior to the
payment date. To retain the appropriate relationship between these reference
or trigger prices and the actual trading price of the Common Stock, the
reference or trigger prices will be increased proportionately if the proposed
Preferred Stock Amendments are approved and effected. The new reference or
trigger prices would be (i) $34.00 between March 15, 1998 and March 15, 1999
and $28.00 thereafter for the mandatory conversion and (ii) $4.00 for stock
dividends.
The terms of the 12% Preferred Stock provide the Company the rights to
redeem all or any part, or to mandatorily convert all, of the 12% Preferred
Stock if the trading price for the Company's Common Stock exceed a trigger
price of $6.00 per share. To retain the appropriate relationship between the
trigger price and actual trading price of the Common Stock, the trigger price
would be increased proportionately to take into account the increased trading
prices expected to result from the Reverse Stock Split. The Preferred Stock
Amendments, if approved, will amend the Certificate of Designation for the 12%
Preferred Stock to increase the trigger price to $48.00 per share.
The terms of the New Preferred Stock, Series B Preferred Stock and 12%
Preferred Stock provide that the holders thereof will have liquidation
preferences upon any voluntary or involuntary liquidation of the Company of
$3.50, $3.50 and $5.00 per share, respectively. To retain the total
liquidation value payable to the holders of the Preferred Stock upon a
liquidation of the Company, these liquidation preferences will be increased
proportionately if the proposed Preferred Stock Amendments were approved and
effected. The new liquidation preferences would be $28.00 per share for the
New Preferred Stock and Series B Preferred Stock and $40.00 per share for the
12% Preferred Stock.
To ensure that holders of the Preferred Stock receive the same
dividends on their shares of Preferred Stock following the Reverse Split
Amendments, the dividend rates will be increased proportionately if the
proposed Preferred Stock Amendments are approved and effected. The dividend
rates would be increased from $0.60 to $4.80 per share per annum for the 12%
Preferred Stock and Series B Preferred Stock and, for the New Preferred Stock,
from $0.315 to $2.52 per share per annum until the end of the twelfth full
calendar quarter following payment of the first dividend and from $0.245 to
$1.96 per share per annum thereafter.
The following table illustrates the principal effects of the proposed
Reverse Split Amendments discussed in the preceding paragraphs:
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<PAGE> 24
<TABLE>
<CAPTION>
Prior to Reverse After Reverse
Split Amendments Split Amendments
Number of Shares of Common Stock ----------------- ----------------
- --------------------------------
<S> <C> <C>
Authorized . . . . . . . . . . . . . . . . . . . 130,000,000 130,000,000
Outstanding . . . . . . . . . . . . . . . . . . 27,521,563 3,440,195
Reserved for future issuance upon
exercise of options or warrants . . . . . . . 7,819,708 977,463
Reserved for issuance in connection with
future grants of 1994 Employee Options (1) . 498,500 62,312
Reserved for issuance upon conversion of
12% Preferred Stock . . . . . . . . . . . . . 400,000 50,000
Reserved for issuance upon conversion of
New Preferred Stock . . . . . . . . . . . . 50,857,782 6,357,223
Reserved for issuance upon conversion of
Series B Preferred Stock . . . . . . . . . . 7,662,180 957,772
Available for future issuance by action of
the Board of Directors (after giving effect
to the above reservations) . . . . . . . . . 35,240,267 118,155,035
Number of Shares of Preferred Stock
- -----------------------------------
Authorized . . . . . . . . . . . . . . . . . . . 60,000,000 60,000,000
Outstanding . . . . . . . . . . . . . . . . . . 19,906,654 2,488,332
Available for future issuance by Board . . . . . 40,093,346 57,511,668
Authorized New Preferred Stock . . . . . . . . . 30,000,000 30,000,000
Outstanding New Preferred Stock . . . . . . . . 16,952,594 2,119,074
Authorized 12% Preferred Stock . . . . . . . . . 400,000 400,000
Outstanding 12% Preferred Stock . . . . . . . . 400,000 50,000
Authorized Series B Preferred Stock . . . . . . 4,000,000 4,000,000
Outstanding Series B Preferred Stock . . . . . . 2,554,060 319,257
Other Effects
- -------------
Redemption/mandatory conversion
trigger price for 12% Preferred Stock . . . . $6.00 $48.00
Mandatory conversion trigger prices
for New Preferred Stock and
Series B Preferred Stock . . . . . . . . . . $4.25/$3.50 $34.00/$28.00
Minimum reference price for stock dividends
on New Preferred Stock and Series B
Preferred Stock . . . . . . . . . . . . . . . $0.50 $4.00
Dividend rate for 12% Preferred Stock . . . . . $0.60 $4.80
Dividend rate for New Preferred Stock
and Series B Preferred Stock . . . . . . . . $0.315/$0.245 $2.52/$1.96
Liquidation preference for New Preferred Stock
and Series B Preferred Stock . . . . . . . . $3.50 $28.00
Liquidation preference for 12% Preferred Stock . $5.00 $40.00
</TABLE>
- ------------------------------------------
(1) The numbers on this line of this table are net of shares issuable upon
exercise of outstanding 1994 Employee Options. A total of 1,750,000
shares is reserved for issuance under the Plan. The number on this line
of the table will also increase if the proposal in this Proxy Statement
to increase the number of shares reserved for the Plan to 5,000,000 is
approved. The current and proposed numbers of shares reserved for
issuance under the Plan will be reduced to 218,750 and 625,000,
respectively, upon effectiveness of the Reserve Split Amendments.
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<PAGE> 25
Assuming the proposed Reverse Split Amendments are approved, a
Certificate of Amendment setting forth the amendments in Exhibit C to this
Proxy Statement will be filed with the Secretary of State of the State of
Delaware (the "Delaware Secretary of State") as promptly as practicable
thereafter. The Reverse Split Amendments and the proposed Reverse Stock Split
would become effective upon the date of filing (the "Effective Date").
EXCHANGE OF STOCK CERTIFICATES AND ELIMINATION OF FRACTIONAL SHARE INTERESTS
As soon as possible after the Effective Date, holders of Common Stock
and Preferred Stock will be notified and requested to surrender their present
Common Stock and Preferred Stock certificates for new certificates representing
the number of whole shares of Common Stock and Preferred Stock after the
Reverse Stock Split. Until so surrendered, each current certificate
representing shares of Common Stock or Preferred Stock will be deemed for all
corporate purposes after the Effective Date to evidence ownership of Common
Stock or Preferred Stock, as the case may be, in the appropriately reduced
whole number of shares. American Securities Transfer Company of Denver,
Colorado will be appointed exchange agent (the "Exchange Agent") to act for
stockholders in effecting the exchange of their certificates.
No scrip or fractional share certificates for Common Stock will be
issued in connection with the Reverse Stock Split, but in lieu thereof, a
certificate or certificates evidencing the aggregate of all fractional shares
otherwise issuable (rounded, if necessary, to the next higher whole share)
shall be issued to the Exchange Agent or its nominee, as agent for the accounts
of all holders of Common Stock or Preferred Stock otherwise entitled to have a
fraction of a share issued to them in connection with the Reverse Stock Split.
Sales of fractional interests will be effected by the Exchange Agent as soon as
practicable on the basis of prevailing market prices of the Common Stock or
Preferred Stock on the over-the-counter market at the time of sale. After the
Effective Date, the Exchange Agent will pay to such stockholders their pro rata
share of the net proceeds derived from the sale of their fractional interests
upon surrender of their stock certificates. No service charges or brokerage
commissions will be payable by stockholders in connection with the sale of
fractional interests, all of which costs will be borne by the Company.
FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of certain federal income tax
consequences of the proposed Reverse Stock Split. This discussion does not
purport to deal with all aspects of federal income taxation that may be
relevant to holders of Common Stock or Preferred Stock and is not intended to
be applicable to all categories of investors, some of which, such as dealers in
securities, banks, insurance companies, tax-exempt organizations and foreign
persons, may be subject to special rules. Furthermore, the following
discussion is based on current provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), and administrative and judicial interpretations as of
the date hereof, all of which are subject to change. Holders of Common Stock
or Preferred Stock are advised to consult their own tax advisors regarding the
federal, state, local and foreign tax consequences of the Reverse Stock Split.
The Reverse Stock Split will be a tax-free recapitalization for the
Company and its stockholders, except with respect to any cash received in lieu
of fractional shares.
The new shares of Common Stock or Preferred Stock in the hands of a
stockholder will have an aggregate basis for computing gain or loss equal to
the aggregate basis of shares of Common Stock or Preferred Stock held by that
stockholder immediately prior to the Reverse Stock Split reduced by the amount
of proceeds, if any, received from the sale of fractional interests and
increased by any gain recognized on that sale.
A stockholder's holding period for the new shares of Common Stock or
Preferred Stock will be the same as the holding period for the shares of Common
Stock or Preferred Stock exchanged therefor, provided all such shares exchanged
were held as a capital asset immediately prior to the exchange.
Stockholders who receive cash for all of their holdings (as a result
of owning fewer than six shares of Common Stock or Preferred Stock) will
recognize a gain or loss for federal income tax purposes as a result of the
disposition of their shares. Although the tax consequences to stockholders who
receive cash for some of their holdings are not entirely certain, those
stockholders in all likelihood will recognize a gain or loss for federal income
tax purposes as a result of the disposition of a portion of their shares of
Common Stock or Preferred Stock. Stockholders who do not receive any cash for
their holdings will not recognize any gain or loss for federal income tax
purposes as a result of the Reverse Stock Split.
-22-
<PAGE> 26
VOTE REQUIRED
The proposed Reverse Split Amendments would effect the Reverse Stock
Split and the Preferred Stock Amendments. Approval of the Reverse Split
Amendments requires the affirmative vote of a majority of all of the issued and
outstanding shares of Common Stock, 12% Preferred Stock, Series B Preferred
Stock and New Preferred Stock, voting together as a single class. Approval of
the Preferred Stock Amendments with respect to the Certificate of Designation
for the New Preferred Stock requires the affirmative vote of two-thirds of all
of the issued and outstanding shares of New Preferred Stock, voting as a
separate class. In addition, approval of the Preferred Stock Amendments with
respect to the Certificates of Designation for the 12% Preferred Stock and the
Series B Preferred Stock requires the affirmative vote of a majority of all of
the issued and outstanding shares of each of the 12% Preferred Stock and Series
B Preferred Stock, each voting as a separate class. Consequently, the
affirmative votes of (i) a majority of all of the issued and outstanding shares
of Common Stock, 12% Preferred Stock, Series B Preferred Stock and New
Preferred Stock, voting together as a single class, (ii) two-thirds of all of
the issued and outstanding shares of New Preferred Stock, voting as a separate
class, and (iii) a majority of all of the issued and outstanding shares of each
of the 12% Preferred Stock and Series B Preferred Stock, each voting as a
separate class, will be required for approval of the Reverse Split Amendments.
The Board of Directors reserves the right to abandon the proposed
Reverse Split Amendments without further action by the stockholders at any time
prior to the filing of the amendments with the Delaware Secretary of State,
notwithstanding authorization of the proposed amendments by the stockholders.
The foregoing summary of the Reverse Split Amendments is qualified in
its entirety by reference to the complete text of the proposed amendments,
which is set forth as Exhibit C to this Proxy Statement.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS
VOTE FOR ADOPTION OF THE REVERSE SPLIT AMENDMENTS.
-----------------------
OTHER BUSINESS
The Company is not aware of any business to be acted upon at the
special meeting other than that which is explained in this Proxy Statement. In
the event that any other business calling for a vote of the stockholders is
properly presented at the meeting, the holders of the proxies will vote your
shares in accordance with their best judgment.
SUBMISSION OF SHAREHOLDER PROPOSALS
Any stockholder who wishes to present a proposal for action at the
1997 annual meeting of stockholders and who wishes to have it set forth in the
proxy statement and identified in the form of proxy prepared by the Company,
must deliver such proposal to the Company at its principal executive offices,
no later than November 1, 1996, in such form as is required under regulations
promulgated by the Securities and Exchange Commission.
RECENT AND FUTURE ACQUISITIONS
ACQUISITION OF ASSETS FROM DEALERS ALLIANCE CREDIT CORP.
On August 6, 1996, the Company completed its acquisition of
substantially all of the assets of DACC. DACC's assets consisted primarily of
used motor vehicle retail installment sales contracts, repossessed motor
vehicles, cash, and certain furniture and equipment. As of June 30, 1996, DACC
had contracts with total unpaid future installments of approximately $35
million and net finance receivables of approximately $14.3 million after
reduction for unearned finance charges of approximately $8.1 million and after
an allowance for credit losses of approximately $12.5 million.
The Company assumed all balance sheet liabilities of DACC, other than
approximately $4.1 million of subordinated debt and warrants and certain other
claims. These liabilities consisted primarily of indebtedness owing to senior
lenders, accounts payable, accrued expenses, an office lease expiring 2002,
service and equipment maintenance agreements and an employment agreement for a
DACC employee. As of June 30, 1996, DACC owed approximately $18 million to its
senior lenders and had accounts payable and accrued expenses of approximately
-23-
<PAGE> 27
$0.7 million. The assumed senior debt bears interest at the prime rate plus
1%, matures on August 2, 1997 and is secured by the contracts purchased from
DACC. The Company must make monthly prepayments of the debt in amounts equal
to any excess of (i) the monthly collections on the purchased contracts over
(ii) up to $475,000 of permitted monthly operating expenses. In addition to
assuming the foregoing liabilities, the Company issued to DACC 766,218 shares
of Series B Preferred Stock, 1,277,030 shares of Common Stock and five-year
warrants to purchase 1,277,030 shares of Common Stock at $2.00 per share
(increasing by $0.25 each year). One-half of the securities issued to DACC at
closing were escrowed until May 2, 1997, and the remainder was escrowed until
August 3, 1997, to secure certain indemnification obligations of DACC in favor
of the Company under the purchase agreement.
The Company also purchased the subordinated indebtedness owing by DACC
and certain related warrants to purchase DACC stock. All of the debt and
warrants were canceled by the Company as part of the consideration for the
transfer of DACC's assets. The Company issued a total of 1,787,842 shares of
Series B Preferred Stock to the two holders of such indebtedness and warrants.
One-fourth of these shares were escrowed until May 2, 1997, and an additional
25% of these shares were escrowed until August 3, 1997, to secure certain
indemnification obligations of the holders in favor of the Company.
As a result of the acquisition of DACC and the issuance of the
Company's securities in connection therewith, the total stockholders' equity of
the Company increased approximately $8.357 million. See "Pro Forma Condensed
Consolidated Balance Sheets."
The Company and the recipients of the Company's securities, including
DACC, also entered into shareholders' agreements that require the Company to
file within six months after the closing, and to use best efforts to cause to
become effective within 90 days thereafter, a registration statement with the
Securities and Exchange Commission for the offer and resale of the securities
issued by the Company in this acquisition. The Company will bear all of the
costs of such registration (other than underwriting discounts, commissions and
expenses incurred by the security holders) and up to $40,000 of the fees of
counsel for the security holders. In the shareholders' agreements, the
security holders agreed to vote their shares of Common Stock and Series B
Preferred Stock in favor of the proposals set forth in this Proxy Statement.
If the proposed clarifying amendments to the terms of the New
Preferred Stock are approved by the Company's shareholders, the shares of
Series B Preferred Stock issued by the Company in the acquisition will be
automatically converted, on a one-for-one basis, into newly issued shares of
New Preferred Stock.
For more information regarding DACC, see the financial statements of
DACC attached to this Proxy Statement.
ACQUISITION OF ASSETS FROM U.S. LENDING CORPORATION
The Company has entered into an Asset Purchase Agreement with U.S.
Lending Corporation ("USLC"), a company subject to Chapter 11 bankruptcy
proceedings. Pursuant to the Asset Purchase Agreement, the Company agreed to
purchase all of USLC's used motor vehicle retail installment sales contracts
and repossessed motor vehicles, and a portion of USLC's cash, on the closing
date. In consideration for the transfer of assets, the Company will issue
shares of its Common Stock and New Preferred Stock based on a purchase price to
be determined at the closing equal to the cash received from USLC, 59% of the
total unpaid installments of USLC's active contracts, plus the wholesale value
of USLC's repossessed vehicles. The number of shares of Common Stock and New
Preferred Stock will equal 100% and 25%, respectively, of the purchase price
divided by specified prices for the New Preferred Stock and Common Stock. The
prices for the New Preferred Stock and Common Stock are fixed at $2.538 and
$1.057 per share, subject to adjustment for the Reverse Stock Split. The
Company is also obligated to issue additional shares of New Preferred Stock and
Common Stock if it collects more than 59% of the total unpaid installments on
USLC's active contracts, based on the same purchase price formula, unless USLC
elects to receive at the closing five-year warrants to purchase Common Stock at
$2.00 per share (increasing by $0.25 per year). The number of shares of Common
Stock purchasable under the warrants will equal 20% of the total Common Stock
equivalents represented by the New Preferred Stock and Common Stock issued at
the closing.
USLC projects that, at the end of August 1996, it will have active
contracts with total unpaid installments of approximately $3.1 million, cash of
approximately $2.9 million (after netting projected fees, claims, and deposits)
and repossessed vehicles with an approximate wholesale value of $24,000.
Assuming these amounts at the closing, (i) the Company would be required to
issue 1,872,734 shares of New Preferred Stock and 1,124,172 shares of Common
Stock, and warrants to purchase 973,928 shares of Common Stock if USLC elects
to receive warrants, subject to adjustment if the Reverse Stock Split is
effected, and (ii) as a result of such issuances, the total stockholders' equity
of the Company will increase by approximately $5.7 million. See "Pro Forma
Condensed Consolidated Balance Sheets." Approval of the proposed clarifying
amendments to the terms of the New Preferred Stock by October 1, 1996 is a
condition to the closing of the Company's purchase from USLC.
-24-
<PAGE> 28
Over the period from February 1993 through May 1995, USLC's historical
credit losses on its portfolio of contracts as a percentage of the outstanding
contracts receivable were approximately 26%. The Company believes USLC's
historical financial statements are not indicative of the performance of the
assets being acquired and would not be useful to investors. Because the
Company is acquiring assets and not USLC's business, USLC's financial
statements are not presented in this Proxy Statement. The Company does not
intend to resume USLC's underwriting or servicing activities. Servicing of
USLC's contracts will be transferred to the Company's existing Dallas, Texas
facility. As a consequence, the expenses of USLC reflected in its prior
financial statements may not be indicative of the Company's future expenses
with respect to the acquired assets. The Company's financial condition,
liquidity and capital resources will be improved immediately by the acquired
cash and over time by the collection of the contracts acquired from USLC. The
Company does not expect to have any substantial increase in general and
administrative expenses as a result of the acquisition and, consequently,
expects to have improved operating results from the increased revenues
resulting from the collection of the contracts acquired from USLC.
PRO FORMA FINANCIAL INFORMATION
The following condensed consolidated financial statements of the
Company and its subsidiaries set forth unaudited condensed consolidated balance
sheets as of June 30, 1996 and unaudited condensed consolidated statements of
operations for the six-month transition period ended March 31, 1996 and the
three month period ended June 30, 1996, on an actual historical basis and on a
pro forma adjusted basis to give effect to (i) the purchase of DACC's assets,
the assumption of certain of DACC's liabilities, the issuance by the Company of
Common Stock, Series B Preferred Stock and warrants, and the assumption and
restructuring of DACC's revolving credit agreement in connection therewith, and
(ii) the purchase of USLC's assets and the issuance by the Company of Common
Stock, New Preferred Stock and warrants in connection therewith.
-25-
<PAGE> 29
SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Pro Forma Adjustments
------------------------
Historical DACC (a) USLC (m) Pro Forma
---------- -------- -------- ---------
<S> <C> <C> <C> <C>
ASSETS
- ------
Gross contracts receivable $ 30,344 $ 34,947 $ 4,379 $ 69,670
Unearned interest (5,621) (8,143) (b) (1,007) (14,771)
-------- --------- -------- ---------
Net contracts receivable 24,723 26,804 3,372 54,899
Allowance for credit losses (10,506) (12,502) (920) (23,928)
Net loan origination costs 274 -- -- 274
-------- --------- -------- ---------
Net contracts receivable - after 14,491 14,302 2,452 31,245
-------- --------- -------- ---------
allowance for credit losses and
other costs
Cash and cash equivalents 20,871 531 (e) 3,339 24,741
Vehicles held for resale 356 604 -- 960
Property and equipment, net 988 233 -- 1,221
Other assets, net 210 200 -- 410
Goodwill -- 11,158 (d) -- 11,158
-------- --------- -------- ---------
Total assets $ 36,916 $ 27,028 $ 5,791 $ 69,735
======== ========= ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Lines of credit -- 18,000 -- 18,000
Accrued settlements 500 -- -- 500
Dividends payable 1,610 -- -- 1,610
Accounts payable and other liabilities 2,477 671 -- 3,148
Accrued interest -- -- -- --
-------- --------- -------- ---------
Total liabilities 4,587 18,671 -- 23,258
-------- --------- -------- ---------
Stockholders' Equity
- --------------------
Preferred stock 175 26 (c) 23 (n) 224
Common stock 302 13 (c) 14 (n) 329
Additional paid-in capital 86,532 8,318 (c) 5,754 (n) 100,604
Accumulated deficit (53,530) -- -- (53,530)
Treasury stock (1,150) -- -- (1,150)
-------- --------- -------- ---------
Total stockholders' equity 32,329 8,357 5,791 46,477
-------- --------- -------- ---------
Total liabilities and stockholders' equity $ 36,916 $ 27,028 $ 5,791 $ 69,735
======== ========= ======== =========
</TABLE>
See accompanying notes to pro forma condensed consolidated financial
statements.
-26-
<PAGE> 30
SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 1996 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Pro Forma Adjustments
Six Months Ended --------------------------------------
March 31, 1996 DACC (f) USLC (o) Pro Forma
----------------- --------- -------- ---------
<S> <C> <C> <C> <C>
Interest revenue $ 3,541 $ 3,554 $ 660 $ 7,755
Interest expense (1,306) (813) (g) -- (2,119)
--------- ---------- --------- --------
Net interest income (loss) 2,235 2,741 660 5,636
Provision for credit losses (4,982) -- (h) -- (4,982)
--------- ---------- --------- --------
Net interest income (loss) after provision for
credit losses (2,747) 2,741 660 654
--------- ---------- --------- --------
General and administrative expense (8,098) (1,700)(i) (108) (r) (9,906)
Goodwill amortization -- (372)(j) -- (372)
Settlement expense (535) -- -- (535)
--------- ---------- --------- --------
Income (loss) before extraordinary item (11,380) 669 552 (10,141)
Extraordinary gain on discharge of debt 8,709 -- -- 8,709
--------- ---------- --------- --------
Net income (loss) (2,671) 669 552 (1,450)
Preferred stock dividends (327) (402) (k) (357) (p) (1,086)
--------- ---------- --------- --------
Net income (loss) attributable to common
stockholders $ (2,998) $ 267 $ 195 $ (2,530)
========= ========== ========= ========
Common stock dividends $ 0 $ 0 $ 0 $ 0
========= ========== ========= ========
Income (loss) per common share before
extraordinary item $ (1.12) $ 0.21 $ 0.14 $ (0.86)
Gain on extraordinary item 0.83 -- -- 0.67
--------- ---------- --------- --------
Income (loss) per common share $ (0.29) $ 0.21 $ 0.14 $ (0.19)
========= ========== ========= ========
Weighted average number of common
shares outstanding 10,447 1,277 (l) 1,358 (q) 13,082
========= ========== ========= ========
</TABLE>
See accompanying notes to pro forma condensed consolidated financial
statements.
-27-
<PAGE> 31
SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Pro Forma Adjustments
Three Months Ended -----------------------------------------
June 30, 1996 DACC (f) USLC (o) Pro Forma
----------------- --------- -------- ---------
<S> <C> <C> <C> <C>
Interest revenue $ 1,659 $ 1,777 $ 330 $ 3,766
Interest expense -- (407)(g) -- (407)
--------- ------- ------ -------
Net interest income (loss) 1,659 1,370 330 3,359
Recovery of (provision for) credit losses 1,382 -- (h) -- 1,382
--------- ------- ------ -------
Net interest income (loss) after provision for 3,041 1,370 330 4,741
--------- ------- ------ -------
credit losses
General and administrative expense (2,528) (850) (i) (54) (r) (3,432)
Goodwill amortization -- (186) (j) -- (186)
--------- ------- ------ -------
Net income (loss) before dividends 513 334 276 1,123
--------- ------- ------ -------
Preferred stock dividends (1,404) (201) (k) (178) (p) (1,783)
--------- ------- ------ -------
Net income (loss) attributable to common (891) $ 133 $ 98 $ (660)
stockholders ========= ======= ====== =======
Common stock dividends $ 0 $ 0 $ 0 $ 0
========= ======= ====== =======
Income (loss) per common share $ (0.03) $ 0.10 $ 0.07 $ (0.02)
========= ======= ====== =======
Weighted average number of common
shares outstanding 26,628 1,277 (l) 1,358 (q) 29,263
========= ======= ====== =======
</TABLE>
See accompanying notes to pro forma condensed consolidated financial
statements.
-28-
<PAGE> 32
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
(a) Represents the assets purchased and liabilities assumed from DACC, as
though the transaction had occurred on June 30, 1996. Except as
otherwise noted, each line item adjustment is taken directly from a
corresponding line item in the Statement of Financial Condition for
DACC as of June 30, 1996. Excluded from the adjustments are the
following line items from DACC's balance sheet which represent either
liabilities not assumed or assets that have no value to the Company:
<TABLE>
<S> <C>
Subordinate debt issue cost $ 280,589
Other assets 323,008
Due to related party 8,017
Senior subordinated notes payable, net 3,513,598
Warrants 563,767
Redeemable Series A preferred stock 8,787,972
</TABLE>
(b) Represents unearned finance charges of $(8,092,739) plus unearned
ancillary income of $(50,578).
(c) Represents the issuance of 2,554,060 shares of $0.01 par value Series
B Preferred Stock valued at $2.54 per share, 1,277,030 shares of
$0.01 par value Common Stock valued at $1.06 per share and 1,277,030
warrants to purchase Common Stock valued at $0.41 per warrant.
(d) Goodwill is derived from the total value of issued stock less the net
assets (assets less liabilities) acquired from DACC:
<TABLE>
<CAPTION>
As of June 30, 1996
-------------------
<S> <C>
Total assets $15,870,000
Goodwill 11,158,000
-----------
$27,028,000
===========
Total liabilities $18,671,000
Stockholders' equity 8,357,000
-----------
$27,028,000
===========
</TABLE>
(e) Represents DACC's cash and cash equivalents at June 30, 1996 of
$687,806 net of $157,000 of cash retained by DACC to pay certain
obligations and transaction expenses.
(f) Represents the revenues and expenses attributable to the assets
purchased and liabilities assumed from DACC as though the transaction
had occurred on October 1, 1995. Except as otherwise noted, each line
item is the sum of (x) the corresponding line item in the audited
Statement of Operations of DACC for the three months ended March 31,
1996 plus (y) an estimate of the line item for the fourth quarter of
1995 derived from the corresponding line item in DACC's audited
Statement of Operations for the year ended December 31, 1995.
(g) Represents interest on DACC's revolving credit agreement and excludes
interest on senior subordinated notes payable which the Company will
not assume.
(h) Assumes sufficient provisions for credit losses at the time of the
Company's acquisition.
(i) Represents estimated general and administrative expenses after taking
into account a reduction of operations at DACC's facilities. Without
reduction, these expenses would have been $2,788,000 for the six
months ended March 31, 1996. Reduction in personnel, occupancy,
consulting, professional and data processing expenses have been and
will be made. Additionally, non-recurring costs have been eliminated.
(j) Represents amortization of goodwill over 180-month period.
-29-
<PAGE> 33
(k) Represents six or three months, as the case may be, of dividends at a
rate of $0.315 per annum per share on 2,554,060 new shares of Series B
Preferred Stock issued in the acquisition from DACC.
(l) Represents number of new shares of Common Stock issued in the
acquisition from DACC.
(m) The numbers in this column represent estimates by the Company of the
assets purchased from USLC as though the purchase had occurred on
March 31, 1996. Each line item adjustment, except as otherwise noted,
is based on unaudited information supplied by USLC.
(n) Based on the purchase price formula for USLC's assets, the Company
would have issued approximately 2,265,000 shares of $0.01 par value
New Preferred Stock and approximately 1,358,000 shares of $0.01 par
value Common Stock. The excess over par value would be recorded as
additional paid in capital.
(o) The numbers in this column represent estimates by the Company of the
revenues and expenses attributable to the assets purchased from USLC
as though the purchase had occurred on October 1, 1995. Each line
item adjustment, except as otherwise noted, is based on unaudited
information supplied by USLC.
(p) Represents six or three months, as the case may be, of dividends at a
rate of $0.315 per annum per share on the estimated 2,265,000 shares
of New Preferred Stock issued in the acquisition from USLC.
(q) Represents estimated number of new shares of Common Stock issued in
the acquisition from USLC.
(r) Represents the Company's estimate of maximum expenses for a remote bad
debt collection office, which the Company expects to establish in
Florida to collect past due contracts purchased from USLC.
-30-
<PAGE> 34
SAFE HARBOR STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Proxy Statement contains certain forward-looking statements, as
defined in the Private Securities Litigation Reform Act of 1995, which may be
identified by the use of forward-looking terminology such as "may," "will,"
"expect," "anticipate," "estimate," "project," "goal," "continue," or
comparable terminology. Such statements involve risks or uncertainties and are
qualified in their entirety by the cautions and risk factors contained in the
Company's Form 10-K Report for the six-month transition period ended March 31,
1996 and in other Company documents filed with the Securities and Exchange
Commission.
ANNUAL AND QUARTERLY REPORTS
The Company's Form 10-K Report for the six-month transition period
ended March 31, 1996 and Form 10-Q Quarterly Report for the three months ended
June 30, 1996 are enclosed herewith and incorporated herein by reference.
INDEPENDENT PUBLIC ACCOUNTANTS
The independent accounting firm of BDO Seidman, L.L.P. has served as
auditors for the Company and its subsidiaries for the transition period ended
March 31, 1996 and has been selected to so serve for the fiscal year ending
March 31, 1997 until and unless changed by action of the Board of Directors. A
representative of BDO Seidman, L.L.P. is expected to be present and available
at the special meeting of stockholders to respond to appropriate questions and
will be given an opportunity to make a statement, if desired.
MISCELLANEOUS
The accompanying proxy is being solicited on behalf of the Board of
Directors of the Company. The expense of preparing, printing and mailing the
proxy and the material used in the solicitation thereof will be borne by the
Company. In addition to the use of the mails, proxies may be solicited by
directors and regular officers and employees of the Company by means of
personal interview, telephone or telegram. Arrangements may also be made with
brokerage houses and other custodians, nominees and fiduciaries for the
forwarding of solicitation materials to the beneficial owners of stock held of
record by such person, and the Company may reimburse them for reasonable
out-of-pocket expenses of such solicitation. MacKenzie Partners, Inc. has been
retained to assist in the solicitation of proxies for a fee of $5,000, plus
reimbursement of out-of-pocket expenses. The total cost of soliciting proxies
will be borne by the Company.
BY ORDER OF THE BOARD OF DIRECTORS
George C. Evans
Chairman of the Board
Dallas, Texas
August 19, 1996
-31-
<PAGE> 35
INDEX TO FINANCIAL STATEMENTS FOR
DEALERS ALLIANCE CREDIT CORP.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Financial Statements for the three-month period ended
March 31, 1996 and year ended December 31, 1995
Independent auditors' report F-1
Statements of financial condition F-2
Statements of operations F-3
Statements of common stockholders' deficit F-4
Statements of cash flows F-5
Notes to financial statements F-6
Financial Statements for the year ended December 31, 1994 and
for the period from inception, July 16, 1993, to December 31, 1993
Independent auditors' report F-20
Statements of financial condition F-21
Statements of operations F-22
Statements of common shareholders' deficit F-23
Statements of cash flows F-24
Notes to financial statements F-25
Financial Statements for the three-month period
ended June 30, 1996
Statement of financial condition F-32
Statement of operations F-33
Statements of cash flows F-34
</TABLE>
-32-
<PAGE> 36
[BDO SEIDMAN, LLP LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
Board of Directors
Dealers Alliance Credit Corp.
Atlanta, Georgia
We have audited the accompanying statements of financial condition of Dealers
Alliance Credit Corp. as of March 31, 1996 and December 31, 1995, and the
related statements of operations, common stockholders' deficit, and cash flows
for the three months ended March 31, 1996 and for the year ended December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Dealers Alliance Credit Corp.
as of March 31, 1996 and December 31, 1995, and the results of its operations
and its cash flows for the three months ended March 31, 1996 and for the year
ended December 31, 1995 in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company's recurring losses from operations, negative
capital position and notices of default from its principal lenders raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
May 21, 1996, except for Note 7 /s/ BDO SEIDMAN, LLP
which is as of May 24, 1996
F-1
<PAGE> 37
DEALERS ALLIANCE CREDIT CORP.
STATEMENTS OF FINANCIAL CONDITION
================================================================================
<TABLE>
<CAPTION>
MARCH 31, December 31,
1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Net finance receivables (Note 3) $ 35,125,860 $ 33,686,474
Allowance for credit losses (Note 3) (13,450,000) (14,506,538)
- -----------------------------------------------------------------------------------------------------------------
21,675,860 19,179,936
Cash and cash equivalents 368,767 325,678
Repossessed collateral 437,804 569,556
Furniture and equipment, net 248,940 228,570
Prepaid rent (Note 6) 272,167 327,750
Other assets (Note 6) 647,889 711,832
- -----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 23,651,427 $ 21,343,322
=================================================================================================================
LIABILITIES AND COMMON STOCKHOLDERS' DEFICIT
LIABILITIES
Revolving credit agreement advances (Note 4) $ 19,250,000 $ 16,850,000
Accounts payable and accrued expenses 1,138,330 1,001,815
Due to related party (Note 11) 19,399 60,111
Senior subordinated notes payable, net (Note 8) 3,486,991 3,460,872
- -----------------------------------------------------------------------------------------------------------------
23,894,720 21,372,798
WARRANTS (Note 8) 563,767 521,945
REDEEMABLE SERIES A CONVERTIBLE PREFERRED STOCK,
$0.01 par value; 200,000 share authorized, 176,313 and
177,630 shares issued and outstanding, net of $24,645 note
receivable from stockholder (Notes 9 and 11) 8,752,971 8,674,880
COMMON STOCKHOLDERS' DEFICIT (Notes 10 and 11)
Common stock, $0.01 par value; 250,000
shares authorized, 9,402 shares issued and outstanding 94 94
Additional paid-in capital - 82,893
Note receivable from stockholder (25,000) (25,000)
Accumulated deficit (9,535,125) (9,284,288)
- -----------------------------------------------------------------------------------------------------------------
Total common stockholders' deficit (9,560,031) (9,226,301)
- -----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND COMMON STOCKHOLDERS' DEFICIT $ 23,651,427 $ 21,343,322
=================================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE> 38
DEALERS ALLIANCE CREDIT CORP.
STATEMENTS OF OPERATIONS
================================================================================
<TABLE>
<CAPTION>
THREE MONTHS Year
ENDED ended
MARCH 31, 1996 December 31, 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET FINANCE REVENUES
Interest income on finance contracts $1,908,371 $ 5,638,347
Ancillary and other operating income 140,062 326,193
- ----------------------------------------------------------------------------------------------------------------------
Net finance revenues 2,048,433 5,964,540
- ----------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE, NET
Interest expense 699,337 1,342,363
Interest income (9,666) (21,048)
- ----------------------------------------------------------------------------------------------------------------------
Total interest expense, net 689,671 1,321,315
- ----------------------------------------------------------------------------------------------------------------------
Finance income before provision for credit losses 1,358,762 4,643,225
Provision for credit losses - (7,415,113)
- ----------------------------------------------------------------------------------------------------------------------
Net finance income (loss) 1,358,762 (2,771,888)
- ----------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Employee compensation and related expenses 961,881 2,909,563
General and administrative 390,749 965,659
Consulting and professional fees 219,950 980,117
- ----------------------------------------------------------------------------------------------------------------------
Total operating expenses 1,572,580 4,855,339
- ----------------------------------------------------------------------------------------------------------------------
NET LOSS $ (213,818) $(7,627,227)
======================================================================================================================
</TABLE>
Interim results are not necessarily indicative of the results that may be
expected for the entire year.
See accompanying notes to financial statements.
F-3
<PAGE> 39
DEALERS ALLIANCE CREDIT CORP.
STATEMENTS OF COMMON STOCKHOLDERS' DEFICIT
THREE MONTHS ENDED MARCH 31, 1996
AND YEAR ENDED DECEMBER 31, 1995
================================================================================
<TABLE>
<CAPTION>
Note Total
Common Stock Additional receivable common
------------------ paid-in from Accumulated stockholders'
Shares Amount capital stockholder deficit deficit
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE,
at December 31, 1994 9,402 $94 $ 330,574 $ (25,000) $(1,657,061) $(1,351,393)
Compensatory
common stock options - - 39,450 - - 39,450
Preferred stock dividend - - (219,172) - - (219,172)
Preferred stock accretion - - (48,910) - - (48,910)
Warrant accretion - - (19,049) - - (19,049)
Net loss - - - - (7,627,227) (7,627,227)
- --------------------------------------------------------------------------------------------------------------------
BALANCE,
at December 31, 1995 9,402 94 82,893 (25,000) (9,284,288) (9,226,301)
Preferred stock dividend - - (66,280) - - (66,280)
Preferred stock accretion - - (11,810) - - (11,810)
Warrant accretion - - (4,803) - (37,019) (41,822)
Net loss - - - - (213,818) (213,818)
- --------------------------------------------------------------------------------------------------------------------
BALANCE,
at March 31, 1996 9,402 $94 $ - $ (25,000) $(9,535,125) $(9,560,031)
====================================================================================================================
</TABLE>
Interim results are not necessarily indicative of the results that may be
expected for the entire year.
See accompanying notes to financial statements.
F-4
<PAGE> 40
DEALERS ALLIANCE CREDIT CORP.
STATEMENTS OF CASH FLOWS
================================================================================
<TABLE>
<CAPTION>
THREE MONTHS Year
ENDED ended
MARCH 31, 1996 December 31, 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (213,818) $ (7,627,227)
Adjustments:
Provision for credit losses - 7,415,113
Depreciation and amortization 21,568 80,970
Amortization of debt discount and organization fees 62,917 222,212
Compensatory stock options issued to related party - 39,450
Changes in assets and liabilities:
Repossessed collateral 131,752 (511,493)
Other assets 35,321 (1,213,368)
Accounts payable and acrued expenses 136,517 835,542
Due to related party (40,712) 48,254
- ---------------------------------------------------------------------------------------------------------------
Cash provided by (used in) operating activities 133,545 (710,547)
- ---------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of installment contracts receivable (4,966,659) (27,358,521)
Payments received on installment contracts receivable 2,514,695 3,729,126
Purchases of equipment (41,995) (129,685)
Proceeds from sale of assets 3,505 -
- ---------------------------------------------------------------------------------------------------------------
Cash used in investing activities (2,490,454) (23,759,080)
- ---------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Revolving credit agreement advances 2,400,000 16,850,000
Subordinated debt issuance - 4,000,000
Issuance of preferred stock - 2,972,832
- ---------------------------------------------------------------------------------------------------------------
Cash provided by financing activities 2,400,000 23,822,832
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 43,091 (646,795)
- ---------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS at beginning of period 325,678 972,473
- ---------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS at end of period $ 368,767 $ 325,678
===============================================================================================================
NON-CASH ACTIVITIES
Accretion of put value of warrants $ 41,822 $ 19,049
Accretion of value of preferred stock 11,810 48,910
Preferred stock dividend 66,280 219,172
</TABLE>
Interim cash flows are not necessarily indicative of the cash flows
that may be expected for the entire year.
See accompanying notes to financial statements.
F-5
<PAGE> 41
DEALERS ALLIANCE CREDIT CORP.
NOTES TO FINANCIAL STATEMENTS
================================================================================
1. SUMMARY OF SIGNIFICANT BUSINESS DESCRIPTION
ACCOUNTING POLICIES
Dealers Alliance Credit Corp. (the
"Company"), is a specialized indirect
consumer finance company engaged in
financing the purchase of used automobiles
by purchasing retail installment sales
contracts ("Installment Contracts")
primarily from independent used automobile
dealers. The Company was incorporated in
the state of Delaware on July 16, 1993.
USE OF ESTIMATES
The preparation of financial statements in
conformity with generally accepted
accounting principles requires management
to make estimates and assumptions that
affect the reported amounts of assets and
liabilities and disclosure of contingent
assets and liabilities at the date of the
financial statements and the reported
amounts of revenues and expenses during the
reporting period. Actual results could
differ from those estimates.
NON-REFUNDABLE ACQUISITION DISCOUNT
Generally, Installment Contracts are
purchased from dealers at non-refundable
acquisition discounts ("Discount") from the
principal amounts financed by the
borrowers. Prior to January 1, 1996 when an
Installment Contract was purchased, the
Company allocated to the allowance for
credit losses the portion of the Discount
deemed necessary to absorb estimated future
credit losses for the Installment Contract
portfolio. Any remaining amount was
deferred as unearned acquisition discount
and was amortized to interest income using
the interest method over the term of the
Installment Contract. The entire Discount
related to Installment Contracts purchased
subsequent to December 31, 1995 has been
allocated to the Allowance for Credit
Losses, and no discount revenue recognized.
REVENUE RECOGNITION
Each installment contract requires the
customer to make monthly payments over a
fixed term. The difference between the
total amount of contractual payments and
the principal amount financed represents
unearned finance charges. Unearned finance
charges are amortized and recorded as
interest income using the interest method
over the term and at the interest rate
stated in the Installment Contract. When an
Installment Contract becomes 61 or more
days past due or the customer becomes the
subject of a bankruptcy proceeding, income
recognition is suspended until the
Installment Contract is restored to a
current status.
F-6
<PAGE> 42
DEALERS ALLIANCE CREDIT CORP.
NOTES TO FINANCIAL STATEMENTS
================================================================================
The Company derives income from product
warranties sold by a third party that are
financed under the Installment Contracts
(ancillary income). That income is
deferred and recorded as unearned
ancillary income and amortized to revenue
using the sum-of-the-digits method, which
approximates the results of the interest
method, over the terms of the underlying
warranty contracts.
Other operating income, which includes
late charges and deferral fees charged to
customers, is recognized as collected.
ALLOWANCE FOR CREDIT LOSSES
Allowance for credit losses is established
through an allocation at the acquisition
date of the Discount based upon
management's estimate of future credit
losses. Commencing January 1, 1996, the
entire discount has been allocated to the
allowance account. Management
periodically evaluates the adequacy of the
allowance for credit losses by reviewing
credit loss experience, delinquencies, the
value of the collateral and general
economic conditions.
If the allowance for credit losses is
insufficient in comparison to the amount
management believes necessary to absorb
potential losses in the Installment
Contract portfolio, the Company first
transfers amounts from the unearned
acquisition discount, to the extent
available, and then, if necessary, a
provision for credit losses is charged
against earnings.
An Installment Contract is charged to the
allowance for credit losses at the
earliest of the time when the automobile
securing the Installment Contract is
repossessed, the payment under the
Installment Contract is 180 days or more
past due, or the Installment Contract is
otherwise deemed to be uncollectible.
REPOSSESSED AUTOMOBILES
A repossessed automobile is recorded at
its estimated realizable value less
estimated costs of disposition. The
Company commences repossession against the
automobile securing a delinquent account
when it determines that additional
collection efforts are not likely to be
successful. Generally, repossession
occurs when a borrower becomes 60 days
delinquent on an Installment Contract.
Upon repossession, the amount due under an
Installment Contract, net of the related
unearned acquisition discount, if any, is
reduced to the estimated realizable value
of the automobile less estimated costs of
disposition through a charge to the
allowance for credit losses.
F-7
<PAGE> 43
DEALERS ALLIANCE CREDIT CORP.
NOTES TO FINANCIAL STATEMENTS
================================================================================
DEFERRED CONTRACT ACQUISITION COSTS
The Company defers costs directly
associated with the acquisition of
Installment Contracts such as the fees,
commission and dealers incentives and
amortizes such costs using the interest
method as a reduction of interest income
over the term of the Installment
Contracts.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include liquid
investments with original maturities of
three months or less.
FURNITURE AND EQUIPMENT
Furniture and equipment are recorded at
cost and are depreciated over their
estimated useful lives, ranging from 4 to
6 years, using the straight-line method.
Accumulated depreciation at March 31, 1996
and December 31, 1995 was $75,699 and
$57,579, respectively.
DEFERRED LOAN COSTS
Commitment, placement and other fees and
expenses incurred in connection with the
Company's Revolving Credit Agreement and
Subordinated Debt are deferred, as other
assets, and amortized under the
sum-of-the-years digits method to interest
expense over the terms of the related
agreements.
INCOME TAXES
The Company records income taxes in
accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes". Deferred
taxes are recorded based upon temporary
differences between the financial
statement and tax bases of assets and
liabilities using enacted tax rates in
effect for the year in which the
differences are expected to reverse.
Management provides a valuation allowance
for deferred tax assets when they
determine it is more likely than not that
the benefits from such deferred tax assets
will not be realized.
2. FUTURE PROSPECTS The Company's financial statements for the
three months ended March 31, 1996 and for
the year ended December 31, 1995 have been
prepared on a going concern basis, which
contemplates the realization of assets and
settlement of liabilities and commitments
in the normal course of business. The
Company incurred net losses of $213,818
for the three months ended March 31, 1996
and $7,627,227 for the year ended
F-8
<PAGE> 44
DEALERS ALLIANCE CREDIT CORP.
NOTES TO FINANCIAL STATEMENTS
================================================================================
December 31, 1995 resulting in an
accumulated deficit of $9,535,125 and
$9,284,288 at March 31, 1996 and December
31, 1995, respectively. During 1996, the
Company's principal lenders notified the
Company that the Company was in default of
certain financial convenants of the loan
agreement and subordinated note
agreements. In these circumstances, the
outstanding borrowings become immediately
due and payable upon notification of the
lenders. These matters raise substantial
doubt about the ability of the Company to
continue as a going concern. Management's
plans in regard to these matters are
discussed below. The financial statements
do not include any adjustments that might
result from the outcome of this
uncertainty.
In early March 1996 Company determined
that its portfolio of installment
contracts was not performing as had been
previously estimated and, consequently, a
significant provision for credit losses
and resulting addition to the allowance
for credit losses was required as of and
for the period ended December 31, 1995.
The Company immediately informed its senior
revolving credit lenders ("Senior
Lenders") and subordinated debt lenders
("Subdebt Lenders") of its determination
and that, as a consequence, the Company
would be in default on a number of
covenants contained in the revolving
credit agreement with the Senior Lenders
("Senior Loan") and subordinated note
agreement with the Subdebt Lenders
("Subordinated Loan"). On March 19, 1996
the Senior Lenders notified Company that
events of default had occurred under the
Senior Loan and that Company would not be
permitted to make any additional
borrowings thereunder. On March 22, 1996
the Subdebt Lenders notified Company than
events of default had occurred under the
Subordinated Loan.
Neither the Senior Lenders nor the Subdebt
Lenders have demanded payment in full or
accelerated the maturity of those debts.
However, the Senior Loan expired by its
terms on May 1, 1996 and in accordance
with an agreement with the Senior Lenders
the Subdebt Lenders cannot currently
accelerate the Subordinated Loan. The
Senior Lenders have informed Company that
they will not renew the Senior Loan;
however, for an unspecified period of time
they will permit Company to use most of
its cash collections from its loan
portfolio to operate its business less
interest payments.
F-9
<PAGE> 45
DEALERS ALLIANCE CREDIT CORP.
NOTES TO FINANCIAL STATEMENTS
================================================================================
On April 2, 1996 Company retained two
investment banking firms to aid and assist
its efforts to recapitalize the Company
through direct investment, sale or merger.
Although the effort to recapitalize is
continuing and the Senior Lenders are
permitting the Company to operate, no
assurance can be given that Company will
be successful in recapitalizing or that
the Senior Lenders will not accelerate the
Senior Debt and foreclose on the portfolio
collateral prior to the time that any
recapitalization is completed.
3. NET RECEIVABLES Generally, the Company's Installment
Contracts have terms of 24 to 36 months.
The net finance receivables balance
consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, December 31,
1996 1995
--------------------------------------------------------------------------
<S> <C> <C>
Contractual payments due $ 46,371,288 $ 44,900,063
Unearned finance charges (11,328,861) (11,278,054)
--------------------------------------------------------------------------
Contractual principal balance 35,042,427 33,622,009
Unearned ancillary income (84,662) (93,358)
Deferred contract acquisition
costs, net 168,095 157,823
--------------------------------------------------------------------------
Net finance receivables $ 35,125,860 $ 33,686,474
==========================================================================
</TABLE>
F-10
<PAGE> 46
DEALERS ALLIANCE CREDIT CORP.
NOTES TO FINANCIAL STATEMENTS
================================================================================
Activity in the unearned contract
acquisition discount and allowance for
credit losses accounts for the three
months ended March 31, 1996 and the year
ended December 31, 1995 was as follows:
<TABLE>
<CAPTION>
MARCH 31, December 31,
1996 1995
--------------------------------------------------------------------------
<S> <C> <C>
UNEARNED CONTRACT ACQUISITION
DISCOUNT
Balance - beginning of period $ - $ 507,783
Discounts allocated to
unearned acquisition -
discount 1,968,292
Amortized to interest income - (546,402)
Transferred to allowance for -
credit losses (1,376,787)
Related to charge-offs, net - (552,886)
--------------------------------------------------------------------------
Balance - end of period $ - $ -
==========================================================================
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, December 31,
1996 1995
--------------------------------------------------------------------------
<S> <C> <C>
ALLOWANCE FOR CREDIT LOSSES
Balance - beginning of period $14,506,538 $ 598,120
Discounts allocated to
allowance for credit losses 2,185,597 9,383,810
Transferred from unearned
acquisition discount - 1,376,787
Provision for credit losses - 7,415,113
Charge-offs (3,273,975) (4,283,206)
Recoveries 31,840 15,914
--------------------------------------------------------------------------
Balance - end of period $13,450,000 $ 14,506,538
==========================================================================
</TABLE>
The Company's exposure to credit loss in
the event of non-performance by the
customer is represented by the amount of
the Installment Contract less the
acquisition discount. At March 31, 1996
approximately 32%, 24% and 14%, of the
Company's Installment Contracts were
purchased from dealers located in
Tennessee, Georgia and Texas,
respectively.
F-11
<PAGE> 47
DEALERS ALLIANCE CREDIT CORP.
NOTES TO FINANCIAL STATEMENTS
================================================================================
4. REVOLVING CREDIT At March 31, 1996 the Company had a $35
AGREEMENT million revolving credit agreement
("Revolving Credit Agreement"), which was
in default, with three banks, which
expired on May 1, 1996. The Company's
obligations under the Revolving Credit
Agreement are secured by substantially all
of the Company's assets. Borrowings under
the Revolving Credit Agreement were $19.25
million and $16.85 million at March 31,
1996 and December 31, 1995, respectively.
Interest on the borrowings under the
Revolving Credit Agreement is payable
monthly based upon the referenced prime
rate (which was 8.25% at March 31, 1996)
plus 2% per annum. For the three months
ended March 31, 1996 interest expense
amounted to $470,600 and consisted of
interest on advances (weighted average
interest rate of 10.25%) under the
Revolving Credit Agreement, amortization of
the Revolving Credit Agreement fees and
expenses. For the year ended December 31,
1995 interest expense amounted to $975,340
and consisted of interest on advances
(weighted average interest rate of 11.5%)
under the Revolving Credit Agreement,
amortization of the Revolving Credit
Agreement fees and expenses, and
amortization of the cost of an option to
purchase an interest rate protection
agreement.
The Revolving Credit Agreement requires
the Company to maintain specified
financial ratios and to comply with other
covenants. At March 31, 1996 the Company
was in default under this agreement due to
failure to maintain these agreed upon
covenants, including the minimum interest
coverage ratio, minimum tangible net worth
and the ratio of charge-offs to average
net finance receivables.
5. INCOME TAXES The Company has incurred net operating
losses since its inception in 1993 and,
accordingly, no provision for income taxes
for the three months ended March 31, 1996
or for the year ended December 31, 1995
has been recorded.
Net operating loss carryovers, which
aggregate approximately $4,345,000 at
March 31, 1996, are available to reduce
future federal and state income taxes and
expire through December 31, 2010.
Deferred taxes reflect the net tax effect
of temporary differences between the
financial reporting bases of assets and
liabilities and the amounts applicable for
income tax purposes.
F-12
<PAGE> 48
DEALERS ALLIANCE CREDIT CORP.
NOTES TO FINANCIAL STATEMENTS
================================================================================
The Company's net deferred tax assets were
as follows:
<TABLE>
<CAPTION>
MARCH 31, December 31,
1996 1995
--------------------------------------------------------------------------
<S> <C> <C>
Deferred tax asset:
Pre-operating expenses $ 80,000 $ 87,000
Allowance for credit losses 1,718,000 2,348,000
Net operating loss carryover 1,520,000 812,000
--------------------------------------------------------------------------
3,318,000 3,247,000
Less valuation allowance (3,318,000) (3,247,000)
--------------------------------------------------------------------------
Net deferred tax asset $ - $ -
==========================================================================
</TABLE>
6. LEASES AND OTHER OFFICE FACILITY AND EQUIPMENT LEASES
COMMITMENTS
The Company rents its office under a
non-cancellable lease agreement which
terminates in September 2002 and provides
the Company with options, subject to
certain conditions, to lease additional
space in 1996 and 1997. The new lease
requires the Company to reimburse the
landlord for increases over the base year
amounts for certain expenses, such as real
estate taxes, utilities and maintenance.
Upon executing the lease in August 1995
the Company was required to fund $364,000
of future rental payments and $150,000
representing a security deposit. The
unamortized portion of the future rental
payments and the security deposit are
included in "prepaid rent" and "other
assets" at March 31, 1996 and December 31,
1995. The rental prepayment will reduce
future rental payments through March 1997.
Some of the Company's office equipment is
subject to operating leases. The aggregate
rent expense for the office facility and
equipment leases was $58,900 for the three
months ended March 31, 1996 and $74,200
for the year ended December 31, 1995.
DATA PROCESSING AGREEMENT
The Company entered into a five-year
contract, which expires in June 1999, to
receive data processing services. The
contract requires minimum monthly fees for
services rendered.
F-13
<PAGE> 49
DEALERS ALLIANCE CREDIT CORP.
NOTES TO FINANCIAL STATEMENTS
================================================================================
At March 31, 1996, future minimum payments
for non-cancellable leases, including the
new office lease, and data processing
services were as follows:
<TABLE>
<CAPTION>
Data
Leases Processing
---------------------------------------------------------------------------
<S> <C> <C>
Year ending March 31, 1997 $ 128,000 $218,000
Year ending March 31, 1998 383,400 180,000
Year ending March 31, 1999 360,200 180,000
Year ending March 31, 2000 292,300 45,000
Year ending March 31, 2001 287,700 -
Thereafter 424,500 -
---------------------------------------------------------------------------
Total $1,876,100 $623,000
===========================================================================
</TABLE>
7. CONTINGENCIES Subsequent to March 31, 1996, the
employment by the Company of its then
president and then chief financial officer
was terminated. Each believes they were
dismissed without cause. The Company has
been notified by counsel representing
these two former employees that legal
action may be initiated against the
Company for, among other things, severance
payments, recommendations and release of
non-compete agreements.
8. SUBORDINATED DEBT During 1995, the Company issued $4 million
AND WARRANTS of subordinated debt, which is
subordinated to the Company's Revolving
Credit Agreement and bears interest at 10%
per annum, payable quarterly. The first
issue of $2.5 million occurred on October
16, 1995 and the remaining $1.5 million was
issued on December 20, 1995. The
Subordinated Debt matures October 16, 2000,
unless repayment is required by redemption
of the Preferred Stock or the completion of
an initial public offering.
In connection with the issuance of the
Subordinated Debt the lenders were issued
warrant ("Warrants") to purchase 18,467
shares of the Company's Common Stock for
an exercise price of $0.01 per share.
These Warrant are exercisable immediately
and expire in 10 years. If the Warrants
are outstanding on November 1, 1998,
unless the repurchase feature is otherwise
accelerated, the Warrant holders have the
right, under certain conditions, to
require the Company to repurchase the
Warrants at a price per share determined
by dividing
F-14
<PAGE> 50
DEALERS ALLIANCE CREDIT CORP.
NOTES TO FINANCIAL STATEMENTS
================================================================================
the largest of: (i) the Company's then fair
value, (ii) 12 times the Company's net
income for the last 4 quarters or (iii) $14
million divided by the number of
fully-diluted shares of common stock and
common stock equivalents then outstanding.
Upon issuance, the $554,139 fair value of
the Warrants was recorded as original issue
discount. The Company incurred costs
aggregating $369,894 in connection with the
Subordinated Debt. Those costs, which are
included in other assets, and the original
issue discount are amortized as interest
expense over the term of the Subordinated
Debt using the interest method. For the
three months ended March 31, 1996 interest
expense for the subordinated debt was
$101,111 and for the year ended December
31, 1995 interest expense was $64,085. The
Warrant is being accreted over a 36 month
period to an estimated repurchase value of
$995,925 through a charge against net
income available for common stockholders.
Subordinated debt consisted of the
following:
<TABLE>
<CAPTION>
MARCH 31, December 31,
1996 1995
--------------------------------------------------------------------------
<S> <C> <C>
Principal outstanding $4,000,000 $4,000,000
Less:
Original issue discount, net of
accumulated amortization (513,009) (539,128)
--------------------------------------------------------------------------
$3,486,991 $3,460,872
==========================================================================
</TABLE>
9. REDEEMABLE SERIES A The Company has authorized 200,000 shares
CONVERTIBLE PREFERRED of Series A Convertible Preferred Stock
STOCK ("Preferred Stock"), par value $.01 per
share. Holders of the Preferred Stock are
entitled to cumulative annual stock
dividends of 3% on December 30 of each
year. In December 1993, the Company
received commitments to buy 110,000 shares
(gross proceeds of $5.5 million) of its
Preferred Stock, 60% of which was purchased
in December 1993 with the remaining 40%
purchased in September 1994. The December
1993 closing resulted in the issuance of
66,000 shares of Preferred Stock with
proceeds, net of offering costs, of
approximately $3,120,000. The September
1994 closing resulted in the issuance of
44,000 shares of Preferred Stock, with net
proceeds of approximately $2,196,000.
F-15
<PAGE> 51
DEALERS ALLIANCE CREDIT CORP.
NOTES TO FINANCIAL STATEMENTS
================================================================================
On January 25, 1995 the Company's Board of
Directors approved an offering of 60,000
shares of Preferred Stock at $50 per share
to current holders of the Company's
Preferred and Common Stock. The offering
("Rights Offering") resulted in the
Company receiving commitments to purchase
the entire 60,000 shares of Preferred
Stock offered. The terms of the offering
provided for two closings. The initial
closing in May 1995 resulted in the
issuance of 30,000 shares of Preferred
Stock (net proceeds of $1,480,780). The
second closing was on July 24, 1995 and an
additional 30,000 shares of Preferred
Stock (gross proceeds of $1,500,000) were
issued.
Each share of Preferred Stock may be
converted into 1 share of Common Stock at
any time at the option of the holder.
Conversion into Common Stock is mandatory
in the event of a qualified initial public
offering of the Company's Common Stock, as
defined ("IPO").
If an IPO does not occur before December
1, 1998, each holder of Preferred Stock
may require the Company to redeem its
Preferred Stock at the greater of the
Common Stock's per share fair market value
or its liquidation preference. Redemption
is mandatory on November 30, 1999 at the
greater of the Common Stock's per share
fair market value on September 1, 1999 or
its liquidation preference. The
liquidation preference aggregated
$8,903,600 at March 31, 1996 and
$8,837,300 at December 31, 1995. For
financial accounting purposes, the
Preferred Stock is accreted to the greater
of its liquidation preference ($50 per
share) or the Common Stock's per share
fair market value. Management believes
the fair market value of its Common Stock
was $50 per share at December 31, 1995 and
December 31, 1994. For financial
accounting purposes, the dividends were
valued at $50 per share and were charged
to additional paid-in capital, to the
extent available, and then to accumulated
deficit.
Holders of Preferred Stock are entitled to
one vote per share on all stockholder
matters. The Company's Shareholders
Agreement provides that all stockholders
vote for an eight member Board of
Directors comprised of four nominees of
the majority Common Stockholder (see
Related Party Transactions), one nominee
of a specified Preferred Stock holder
group, two nominees of the stockholders
other than majority Common Stockholder and
one nominee who is the Company's chief
executive officers. The Shareholders
Agreement terminates upon completion of an
IPO.
The Preferred Stock ranks senior to the
Common Stock with respect to
F-16
<PAGE> 52
DEALERS ALLIANCE CREDIT CORP.
NOTES TO FINANCIAL STATEMENTS
================================================================================
dividends and liquidation rights.
The provisions of the Revolving Credit
Agreement prohibit the payment of
dividends in cash or property, other than
stock dividends on the Preferred Stock.
10. OPTIONS TO PURCHASE On May 1, 1995, the options to purchase
COMMON STOCK Common Stock granted to certain key
officers of the Company during 1994 were
modified. The modification increased the
number of shares under grant from 17,500 to
25,500. Additionally, the rights of those
grantees under the options vest in their
entirety on December 30, 2000, unless
vesting is accelerated by the Company's
achievement of established operating
performance objectives in 1995 and 1996.
The exercise price per share is $50, which
approximated fair market value per share at
the date of the modification.
On November 30, 1993, a member of the
Board of Directors was granted an option,
which vested immediately, to purchase
2,000 shares of Common Stock at an
exercise price per share of $50, which
approximated fair value per share at the
date of grant, through November 30, 2003.
On May 1, 1995, the option granted to
Chicago Holdings, Inc. ("CHI") (see
Related Party Transactions) in November
1993 to purchase 10,000 shares of Common
Stock at an exercise price of $50 per
share was modified. CHI's option to
purchase those shares vest in its entirety
on December 31, 2000, unless vesting is
accelerated by the Company's achievement
of established operating performance
objectives in 1995 and 1996.
On November 30, 1993, CHI was granted an
option, which vested immediately, to
purchase 10,000 shares of Common Stock. On
May 1, 1995 CHI was granted an option,
which vested immediately, to purchase an
additional 2,500 shares of common stock.
The exercise prices per share of the
options are: $100 during 1996, $150 during
1997 and $200 thereafter through November
30, 2003.
F-17
<PAGE> 53
DEALERS ALLIANCE CREDIT CORP.
NOTES TO FINANCIAL STATEMENTS
================================================================================
The Company obtained valuations from an
independent party for the Common Stock
options granted to CHI. The appraiser
determined the fair value of CHI options
granted or modified in 1995 was
approximately $39,450 at the date of
grant. The Company recognized a non-cash
compensatory charge for such options in
1995. The fair value of the options
granted in 1993 was not material.
11. RELATED PARTY COMMON STOCK TRANSACTIONS
TRANSACTIONS
Approximately 89.4% (8,401 shares) of the
Company's outstanding Common Stock is
owned by a wholly-owned subsidiary of CHI,
a founder of the Company. The remaining
outstanding shares of Common Stock are
owned by the Company's President and its
Chairman. The Chairman purchased 1
founding share. CHI's subsidiary
purchased 1 founding share, 5,040 shares
of the Company's Common Stock in the
December 1993 closing for $240,005 and
3,360 shares in the September 1994 closing
for $160,003.
In September 1994, the Company's then
President purchased 1,000 shares of Common
Stock for $50 per share, payable $25,000
in cash and $25,000 by a five-year full
recourse promissory note which bears
interest at 6% per annum. This note is
collateralized by a pledge of the
Company's stock owned by the President,
requires partial repayments in the event
that the President earns an incentive
bonus in 1996, 1997 or 1998, and
accelerates if the President ceases to be
employed by the Company.
PREFERRED STOCK TRANSACTIONS
In 1995 the Company's then President, as a
participant in the Rights Offering,
purchased a total of 493 shares of
Preferred Stock at $50 per share payable
$98 in cash and $24,552 by full recourse
promissory notes due on September 1, 1999
which bear interest at 6% per annum. Those
notes are collateralized by a pledge of
the Company's stock owned by the
President, require partial repayments in
the event that the President earns an
incentive bonus in 1996, 1997 or 1998, and
accelerate if the President ceases to be
employed by the Company.
F-18
<PAGE> 54
DEALERS ALLIANCE CREDIT CORP.
NOTES TO FINANCIAL STATEMENTS
================================================================================
In 1995, a wholly-owned subsidiary of CHI,
as a participant in the Right Offering,
purchased 4,138 shares of preferred stock
for a cash price of $206,900 ($50 per
share).
MANAGEMENT ADVISORY AGREEMENT
The Company has a management advisory
agreement with CHI. CHI agreed to provide
accounting, legal and other services for
the Company through November 1996. CHI's
compensation for those services is $125
per hour, together with reimbursement of
out-of-pocket expenses, for actual time
devoted to assisting the Company. The
terms of the agreement also provide for
CHI to make its senior management
available, at the Company's request, for
advisory and consulting services through
November 1, 1998. CHI is also entitled to
a monthly fee of $10,000 for 36 months
commencing after the Company achieves and
continues to be profitable on a monthly
basis. The agreement provides for the
Company's payment of a market rate fee to
CHI if CHI successfully arranges
additional indebtedness for the Company.
For the three months ended March 31, 1996
and the year ended December 31, 1995, CHI
charged the Company $64,800 and $249,200,
respectively, in hourly management fees
and reimbursement of out-of-pocket
expenses. During 1995 CHI charged the
Company $111,280 and $75,000 as fees for
negotiating increases to the Company's
Revolving Credit Agreement and its
Subordinated Debt.
In August 1995, the Company entered into
an advisory agreement, which expires in
four years, with EQ Corporation, a
shareholder of the Company, pursuant to
which EQ Corporation will provide certain
financial advisory services to the
Company. The terms of the agreement
required the Company to prepay all fees,
which amounted to approximately $149,000,
upon execution of the agreement. Such
amount has been included in other assets
and will be amortized to expense over the
term of the agreement.
F-19
<PAGE> 55
[DELOITTE & TOUCHE LLP LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Dealers Alliance Credit Corp.:
We have audited the accompanying statements of financial condition of Dealers
Alliance Credit Corp. as of December 31, 1994 and 1993, and the related
statements of operations, shareholders' deficit, and cash flows for the year
ended December 31, 1994 and the period from July 16, 1993 (date of
incorporation) to December 31, 1993. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Dealers Alliance Credit Corp. as of
December 31, 1994 and 1993, and the results of its operations and its cash
flows for the year ended December 31, 1994 and the period from July 16, 1993
(date of incorporation) to December 31, 1993 in conformity with generally
accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
February 17, 1995
F-20
<PAGE> 56
DEALERS ALLIANCE CREDIT CORP.
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1994 AND 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1994 1993
<S> <C> <C>
Net finance receivables $ 3,629,717 $ -
Allowance for credit losses (598,120) -
----------- -----------
Net receivables 3,031,597 -
Cash and cash equivalents 972,473 3,026,389
Repossessed collateral 58,063 -
Furniture and equipment, net 131,411 -
Other assets 67,158 131,507
----------- -----------
$ 4,260,702 $ 3,157,896
=========== ===========
LIABILITIES AND COMMON SHAREHOLDERS' DEFICIT
Accounts payable and accrued expenses $ 166,271 $ 127,265
Due to related party 11,857 148,165
----------- -----------
Total liabilities 178,128 275,430
Series A Convertible Preferred Stock,
$0.01 par value; 200,000 shares authorized,
112,363 and 66,000 shares issued and
outstanding at December 31, 1994 and
1993, respectively 5,433,967 3,120,000
Common Shareholders' Deficit:
Common stock, $0.01 par value; 250,000
shares authorized, 9,402 and 6,302 shares
issued and outstanding at December 31, 1994
and 1993, respectively 94 63
Additional paid-in capital 330,574 299,962
Note receivable from shareholder (25,000) (59,987)
Accumulated deficit (1,657,061) (477,572)
----------- -----------
Total common shareholders' deficit (1,351,393) (237,534)
----------- -----------
$ 4,260,702 $ 3,157,896
=========== ===========
</TABLE>
See notes to financial statements.
F-21
<PAGE> 57
DEALERS ALLIANCE CREDIT CORP.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994 AND PERIOD FROM JULY 16, 1993
(DATE OF INCORPORATION) TO DECEMBER 31, 1993
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
REVENUES:
Interest income:
Finance contracts $ 428,450 $ -
Other 81,411 5,794
Ancillary and other operating income 11,501 -
----------- ---------
Total revenues 521,362 5,794
INTEREST EXPENSE 119,787 -
----------- ---------
NET INTEREST INCOME 401,575 5,794
----------- ---------
OPERATING EXPENSES:
Employee compensation and related expenses 864,183 42,218
Other 716,881 441,148
----------- ---------
Total expenses 1,581,064 483,366
----------- ---------
NET LOSS $(1,179,489) $(477,572)
=========== =========
</TABLE>
See notes to financial statements.
F-22
<PAGE> 58
DEALERS ALLIANCE CREDIT CORP.
STATEMENTS OF COMMON SHAREHOLDERS' DEFICIT
YEAR ENDED DECEMBER 31, 1994 AND PERIOD FROM JULY 16, 1993
(DATE OF INCORPORATION) TO DECEMBER 31, 1993
- -----------------------------------------------------------------------
<TABLE>
<CAPTION>
NOTE
COMMON STOCK ADDITIONAL RECEIVABLE TOTAL COMMON
------------------- PAID-IN FROM ACCUMULATED TREASURY SHAREHOLDERS'
SHARES AMOUNT CAPITAL SHAREHOLDER DEFICIT STOCK DEFICIT
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JULY 16, 1993 - $ - $ - $ - $ - $ - $ -
Issuance of common stock 6,302 63 299,962 (59,987) - - 240,038
Net loss - - - - (477,572) - (477,572)
----- ----- --------- -------- -------- ------ --------
BALANCE, DECEMBER 31, 1993 6,302 63 299,962 (59,987) (477,572) - (237,534)
Repayment of note receivable
from shareholder - - - 29,987 - - 29,987
Repurchase of common stock
for treasury stock (1,260) - - 30,000 - (61,210) (31,210)
Issuance of shares from
treasury stock 1,000 - 1,421 (25,000) - 48,579 25,000
Treasury stock retired - (3) (12,628) - - 12,631 -
Issuance of common stock 3,360 34 159,969 - - - 160,003
Preferred stock dividend - - (118,150) - - - (118,150)
Net loss - - - - (1,179,489) - (1,179,489)
----- ----- -------- -------- ----------- -------- -----------
BALANCE, DECEMBER 31, 1994 9,402 $ 94 $330,574 $(25,000) $(1,657,061) $ - $(1,351,393)
===== ===== ======== ======== =========== ======== ===========
</TABLE>
See notes to financial statements.
F-23
<PAGE> 59
DEALERS ALLIANCE CREDIT CORP.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1994 AND PERIOD FROM JULY 16, 1993
(DATE OF INCORPORATION) TO DECEMBER 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
OPERATING ACTIVITIES:
Interest income received - finance contracts $ 291,197 $ -
Interest income - short-term investments 87,205 -
Ancillary and other operating receipts 5,533
Payments for borrowing fees (36,889) (100,000)
Payments for operating expenses (1,683,453) (233,649)
----------- ----------
Net cash used in operating activities (1,336,407) (333,649)
INVESTING ACTIVITIES:
Purchases of finance contracts (3,316,689) -
Principal payments received on finance contracts 374,836 -
Purchases of furniture and equipment (156,463) -
----------- ----------
Net cash used in investing activities (3,098,316) -
FINANCING ACTIVITIES:
Purchase of treasury stock (30,000) -
Proceeds from issuance of common stock 185,003 240,038
Proceeds from issuance of preferred stock, net 2,195,817 3,120,000
Repayment of note receivable from shareholder 29,987 -
----------- ----------
Net cash provided by financing activities 2,380,807 3,360,038
----------- ----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (2,053,916) 3,026,389
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 3,026,389 -
----------- ----------
CASH AND CASH EQUIVALENTS, END
OF PERIOD $ 972,473 $3,026,389
=========== ==========
RECONCILIATION OF NET LOSS TO NET
CASH USED IN OPERATING ACTIVITIES:
Net loss $(1,179,489) $ (477,572)
Depreciation and amortization:
Furniture and equipment 25,051 -
Contract acquisition discount income (158,331) -
Ancillary income (5,969) -
Contract acquisition costs 21,078 -
Decrease (increase) in other assets 58,555 (131,507)
Increase in accounts payable and accrued expenses 39,006 127,265
Increase (decrease) in due to related party (136,308) 148,165
----------- ----------
NET CASH USED IN OPERATING ACTIVITIES $(1,336,407) $ (333,649)
=========== ==========
</TABLE>
See notes to financial statements.
F-24
<PAGE> 60
DEALERS ALLIANCE CREDIT CORP.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1994 AND PERIOD FROM JULY 16, 1993
(DATE OF INCORPORATION) TO DECEMBER 31, 1993
- -------------------------------------------------------------------------------
1. BUSINESS DESCRIPTION
Dealers Alliance Credit Corp. (the "Company") was incorporated in the
state of Delaware on July 16, 1993, and operates from leased office
space in Atlanta, Georgia. The Company is a finance company specializing
in purchasing and servicing sub-prime automobile installment sales
contracts ("finance contracts"), originated by automobile dealers and
secured by the purchased automobiles. The Company began operations on
December 1, 1993. As of December 31, 1994, the Company had purchased
finance contracts from dealers located in seven southeastern states.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nonrefundable Contract Acquisition Discount - Generally, finance
contracts are purchased from dealers at nonrefundable contract
acquisition discounts from the principal amounts financed by the
borrowers, "Dealer Discount." The amount of this Dealer Discount, which
includes both credit and yield enhancement, is negotiated by the Company
with the dealer.
When a finance contract is purchased, the Company allocates to the
allowance for credit losses the portion of the Dealer Discount deemed
necessary to absorb estimated future credit losses for the finance
contract portfolio. Any remaining amount is deferred as unearned
contract acquisition discount and is amortized to interest income using
the interest method over the term of the finance contract. When a
specific finance contract is determined to be uncollectible, any
unearned contract acquisition discount related to that contract is
offset against the unpaid contract balance prior to charging the
allowance for credit losses.
Revenue Recognition - Each finance contract requires the borrower to
make monthly payments over a fixed term. The difference between the
total amount of contractual payments and the principal amount financed
represents unearned finance charges. Unearned finance charges are
amortized and recorded as interest income using the interest method over
the term and at the interest rate stated in the finance contract. When a
finance contract becomes 61 or more days past due, income recognition is
suspended until the contractual aging is restored to a current status.
The Company receives commissions from the sale of warranty contracts.
Those commissions are deferred and recorded as unearned ancillary income
and amortized to revenue using the sum-of-the-digits method, which
approximates the results of the interest method, over the terms of the
underlying warranty contracts.
Other operating income, which includes late charges and extension fees
charged to customers, is recognized as collected.
Allowance for Credit Losses - Allowance for credit losses is established
through an allocation of the Dealer Discount based upon management's
estimate of future credit losses. Management believes that the allowance
for credit losses and the related unearned contract acquisition
discounts are adequate to
F-25
<PAGE> 61
absorb potential losses in the portfolio. Management evaluates the
adequacy of the allowance for credit losses by reviewing credit loss
experience, delinquencies, the value of the underlying collateral and
general economic conditions.
If necessary, a provision for credit losses will be charged against
earnings to maintain the allowance for credit losses at an amount
management believes necessary to absorb potential losses in the finance
contract portfolio. Through December 31, 1994, the allocations of Dealer
Discounts to the allowance for credit losses together with unearned
contract acquisition discounts have been adequate to absorb all
estimated credit losses. Accordingly, no provision for credit losses has
been required.
A finance contract is charged to the allowance for credit losses at the
earliest of the month in which the related collateral is repossessed,
the finance contract is six months or more past due, or the finance
contract is otherwise deemed to be uncollectible.
Repossessed Collateral - Repossessed collateral is recorded at its
estimated net realizable value. The Company commences repossession
against collateral when it determines that other collection efforts are
not likely to be successful. Usually repossession occurs before a
borrower has defaulted on two consecutive monthly payments. Upon
repossession, the net amount due under a finance contract is reduced to
the estimated net realizable value of the collateral through a charge to
the related unearned contract acquisition discount with any remaining
amount charged to the allowance for credit losses.
Deferred Contract Acquisition Costs - The Company defers costs directly
associated with the acquisition of finance contracts and amortizes such
costs using the interest method as a reduction of interest income over
the term of finance contracts.
Cash and Cash Equivalents - Cash and cash equivalents include highly
liquid investments with an original maturity of three months or less.
Furniture and Equipment - Furniture and equipment are recorded at cost
and are depreciated over their estimated useful lives, ranging from 4 to
6 years, using the straight-line method. Accumulated depreciation at
December 31, 1994 was $25,051.
Revolving Credit Facility Fees - Commitment and facility fees and
expenses are paid to the Company's lender in accordance with the
provisions of the Company's revolving credit facility. Those deferred
costs are included in other assets and amortized to interest expense
over the term of the facility.
Income Taxes - The Company records income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes." Deferred taxes are recorded based upon
temporary differences between the financial statement and tax bases of
assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse. The Company incurred net
operating losses in 1994 and 1993 and, accordingly, no provision for
income taxes was made for the year ended December 31, 1994 and the
period from July 16, 1993 (date of incorporation) to December 31, 1993.
Postretirement and Postemployment Benefits - The Company does not offer
postretirement or postemployment benefits to its employees. Accordingly,
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions," and SFAS No. 112, "Employers' Accounting for
Postemployment Benefits," have no effect upon the Company's financial
position or results of operations.
F-26
<PAGE> 62
3. FINANCE RECEIVABLES
Generally, the Company's finance contracts have terms of 12 to 36 months.
The net finance receivables balance consisted of the following at December
31, 1994:
<TABLE>
<S> <C>
Contractual payments due $ 5,492,830
Unearned finance charges (1,433,492)
-----------
Total finance receivables 4,059,338
Unearned contract acquisition discount (507,783)
Unearned ancillary income (11,741)
Deferred contract acquisition costs, net 89,903
-----------
Net finance receivables $ 3,629,717
===========
</TABLE>
At December 31, 1994 contractual payments due under finance contracts are
scheduled to be received as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
<S> <C>
1995 $2,342,707
1996 2,096,651
1997 1,049,816
1998 3,656
----------
Total $5,492,830
==========
</TABLE>
The Company's experience has shown that some payments will be received prior
to contractual due dates.
When a finance contract is determined to be uncollectible, the unpaid
account balance due is reduced by the net realizable value of the
repossessed collateral and any remaining unearned contract acquisition
discount. The net amount remaining, if any, is charged to the allowance for
credit losses. Activity in the unearned contract acquisition discount and
allowance for credit losses accounts for the year ended December 31, 1994,
was as follows:
<TABLE>
<CAPTION>
UNEARNED ALLOWANCE
CONTRACT FOR
ACQUISITION CREDIT
DISCOUNT LOSSES
<S> <C> <C>
Balance - beginning of year $ - $ -
Discounts negotiated 703,422 747,441
Amortized to interest income (158,331) -
Charge-offs, net (37,308) (149,321)
--------- ---------
Balance - end of year $ 507,783 $ 598,120
========= =========
</TABLE>
F-27
<PAGE> 63
4. REVOLVING CREDIT FACILITY
The Company has an $8 million revolving credit facility with a bank
("Facility"), which expires on December 31, 1995. Borrowings are
secured by substantially all of the Company's assets. During 1994, the
Company's operations did not require advances under the Facility.
Interest on the borrowings under the Facility is payable monthly based
upon the referenced prime rate, which was 8.5% at December 31, 1994,
plus 2% per annum. Interest expense, which consisted solely of
commitment and facility fees and expenses, for the year ended December
31, 1994 was $119,787. The Facility requires the Company to maintain
specified financial ratios and to comply with other covenants.
In January 1995, the Company acquired an option, exercisable on or
before December 31, 1995, to purchase a contract which would provide
interest rate protection during 1996 and 1997 on various notional
amounts up to $15 million. The option is held for purposes other than
trading. If the Company exercised its option and if the contract's
referenced interest rate exceeds 12% during 1996 and 1997, then the
Company would receive a payment computed using the rate differential
multiplied by the applicable notional amount for that period. The
contract exposes the Company to credit risk through counterparty
nonperformance which risk is mitigated by the counterparty's financial
condition. The Company would not require collateral or other security to
support financial instruments with off-balance sheet credit risk.
5. INCOME TAXES
Net operating loss carryovers, which aggregate approximately
$1,255,000, are available to reduce future federal and state income
taxes and expire in 2008 and 2009.
Deferred tax asset reflects the net tax effect of temporary differences
between the financial reporting bases of assets and liabilities and the
amounts applicable for income tax purposes. The Company's net deferred
tax asset at December 31, 1994 and 1993 was:
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Deferred tax asset:
Preoperating expenses $ 116,000 $ 145,000
Allowance for credit losses 34,000
Net operating loss carryover 477,000 36,000
-------- ---------
627,000 181,000
Less valuation allowance (627,000) (181,000)
--------- ---------
Net deferred tax asset $ - $ -
========= =========
</TABLE>
6. LEASES AND OTHER COMMITMENTS
Office Lease - The Company rents its office under a noncancellable
lease agreement with an initial term of four years. The lease requires
the Company to reimburse the landlord for increases over the base year
amounts for certain expenses, such as real estate taxes, utilities, and
maintenance. Some of the Company's office equipment is subject to
operating leases. The aggregate rental expense for the office and
equipment leases was $41,429 for the year ended December 31, 1994 and
$5,984 for the period from July 16, 1993 (date of incorporation) to
December 31, 1993.
Data Processing Agreement - The Company entered into a five-year
contract, which expires in May 1999, to receive data processing
services. The contract requires minimum monthly servicing fees.
F-28
<PAGE> 64
At December 31, 1994, future minimum payments for noncancellable leases
and data processing services were as follows:
<TABLE>
<CAPTION>
DATA
YEAR ENDING DECEMBER 31: LEASES PROCESSING
<S> <C> <C>
1995 $ 41,756 $117,500
1996 41,239 218,000
1997 38,655 184,000
1998 - 180,000
1999 - 75,000
-------- --------
Total $121,650 $774,500
======== ========
</TABLE>
Employment Agreements - The Company has employment agreements with
certain key officers which provide for aggregate base annual
compensation of $426,500 plus bonuses based on certain operating
performance goals in 1995. The agreements expire on various dates
through December 31, 1995 and may be extended by mutual agreement.
Additionally, the agreements require termination payments in the event
of the employee's involuntary termination. At December 31, 1994, the
aggregate amount of the contingent termination obligation was $196,375.
7. SERIES A CONVERTIBLE PREFERRED STOCK
The Company has authorized 200,000 shares of Series A Convertible
Preferred Stock ("Preferred Stock"), par value $.01 per share. In
December 1993, the Company received commitments to buy 110,000 shares
(gross proceeds of $5.5 million) of its Preferred Stock, 60% of which
was purchased in December 1993 with the remaining 40% purchased in
September 1994. The December closing resulted in the issuance of 66,000
shares of Preferred Stock with proceeds, net of offering costs, of
approximately $3,120,000. The September closing resulted in the issuance
of 44,000 shares of Preferred Stock, with net proceeds of approximately
$2,196,000. Holders of the Preferred Stock are entitled to an annual
stock dividend of 3% on December 30 of each year. Additionally, for
financial reporting purposes, the Preferred Stock is accreted to the
greater of the Common Stock's per share fair market value or its
liquidation preference ($50 per share). Management believes the fair
market value of its Common Stock was $50 per share at December 31, 1994.
A stock dividend of 2,363 shares was declared for holders of record as
of December 31, 1994. For financial accounting purposes, that dividend
was valued at $50 per share, or $118,500 and was charged to additional
paid-in capital.
Each share of Preferred Stock may be converted into one share of Common
Stock at any time at the option of the holder. Conversion into Common
Stock is mandatory in the event of a qualified initial public offering
("IPO") of the Company's Common Stock.
If an IPO does not occur before December 1, 1998, each holder of
Preferred Stock may require the Company to redeem its Preferred Stock at
the greater of the Common Stock's per share fair market value or its
liquidation preference. Redemption is mandatory on November 30, 1999 at
the greater of the Common Stock's per share fair market value on
September 1, 1999 or its liquidation preference. The liquidation
preference aggregated $5,618,150 at December 31, 1994.
F-29
<PAGE> 65
Holders of Preferred Stock are entitled to one vote per share on all
shareholder matters. The Company's Shareholders' Agreement provides that
all shareholders vote for a seven-member Board of Directors comprised of
four nominees of the majority Common Stockholder (see Related Party
Transactions), one nominee of a specified Preferred Stockholder group,
and two nominees of the stockholders other than the majority Common
Stockholder.
The Preferred Stock ranks senior to the Common Stock with respect to
dividends and liquidation rights.
8. COMMON STOCK
On December 1, 1993, the Company received commitments to buy 10,500
shares (gross proceeds of $500,000) of its Common Stock (see Related
Party Transactions) of which 60% were purchased in December 1993, with
the remaining 40% purchased at a second closing which occurred in
September 1994. The December closing resulted in the issuance of 6,300
shares of Common Stock, with the Company receiving cash of $240,038 and
a note receivable in the amount of $59,987. In September 1994, the
Company received cash of $160,003 for purchase of the remaining
committed shares of Common Stock.
The provisions of the Facility prohibit the payment of dividends in cash
or property, other than stock dividends on the Preferred Stock.
9. COMMON STOCK OPTIONS
At December 31, 1994, the Company had outstanding options to acquire
shares of the Company's Common Stock, as follows:
<TABLE>
<CAPTION>
DATE NUMBER
OF OF EXERCISE EXERCISE
OPTION HOLDER GRANT SHARES PRICE CONDITION
<S> <C> <C> <C> <C>
Chicago Holdings, Inc. 1993 10,000 $50 (a)
Chicago Holdings, Inc. 1993 10,000 Various (b)
Management 1994 17,500 $50 (c)
Member of the Board
of Directors 1993 2,000 $50 Expires
December,
2003
</TABLE>
(a) Chicago Holdings, Inc. ("CHI") (see Related Party Transactions),
has options to acquire 10,000 shares of the Company's Common
Stock at $50 per share. Those options are exercisable after the
second, third, and fourth years of the Company's operations if
certain financial goals are achieved. Those options expire in
December 2003.
(b) CHI also has vested options, which expire in December 2003, to
acquire an additional 10,000 shares of the Company's Common
Stock. The exercise prices per share of those options are: $75
during 1994, $100 during 1995 and 1996, $150 during 1997, and
$200 thereafter through December 2003.
(c) Management's options to acquire 17,500 shares of the Company's
Common Stock at $50 per share are exercisable after the second
and third years of the Company's operations if financial goals
are achieved.
F-30
<PAGE> 66
10. RELATED PARTY TRANSACTIONS
Common Stock Transactions - Approximately 89.4% (8,401 shares) of the
Company's outstanding Common Stock is owned by a wholly owned subsidiary
of CHI, a founder of the Company. The remaining outstanding shares of
Common Stock are owned by the Company's President and its Chairman.
CHI's subsidiary purchased one founding share, 5,040 shares of the
Company's Common Stock in the December 1993 closing for $240,005, and
3,360 shares in the September 1994 closing for $160,003.
Approximately $60,000 of the $300,000 proceeds from the issuance of the
Company's Common Stock in December 1993 was paid with a 6% note due from
the Company's former President. The note was due in two installments
($29,987 on January 17, 1994 and $30,000 on December 1, 1998).
In connection with the resignation of the Company's former President
during June 1994, the following were consummated: (i) consulting
services of the former President were retained through the end of 1994
for a fee of $75,000, (ii) his stock options were terminated, (iii) his
commitment to acquire additional shares of Common Stock was terminated,
and (iv) his 1,260 shares of the Common Stock were purchased by the
Company, as treasury stock, in exchange for the original purchase price
of $61,210 ($30,000 of cash and the cancellation the above promissory
note).
In September 1994, the Company's new President purchased 1,000 shares of
treasury Common Stock for $50 per share, payable $25,000 in cash and
$25,000 by a five-year promissory note which bears interest at 6% per
annum.
Management Advisory Agreement - The Company has a management advisory
agreement with CHI. CHI agreed to provide accounting, legal, and other
services for an initial term expiring on November 30, 1996. CHI's
compensation for services performed under the agreement is (i) $125 per
hour, together with reimbursement of out-of-pocket expenses, for actual
time devoted to the Company's business, (ii) a transaction structuring
fee of $120,000 (which was paid during 1994), and (iii) a monthly fee of
$10,000 for 36 months commencing after the Company achieves and
continues to be profitable on a monthly basis. The agreement provides
for the Company's payment of a market rate fee to CHI if CHI
successfully arranges additional indebtedness for the Company. During
1994 and 1993, CHI charged the Company $125,875 and $23,875,
respectively, in hourly management fees and $26,806 and $390,815,
respectively, for reimbursement of out-of-pocket expenses.
11. IMPACT OF NEW ACCOUNTING STANDARDS
The Company expects to adopt SFAS No. 107, "Disclosure About Fair Value
Of Financial Instruments," in 1995. Since SFAS No. 107 requires
disclosures only as to the fair value of financial instruments, the
adoption of SFAS No. 107 will have no effect on the Company's financial
position or results of operations.
12. SUBSEQUENT EVENT
On January 25, 1995, the Company's Board of Directors approved an
offering of 60,000 shares of Preferred Stock at $50 per share (gross
proceeds of $3,000,000) to current holders of the Company's Preferred
and Common Stock. The terms of the offering provide for two closings
with proceeds of $1.5 million to be derived from the initial closing.
F-31
<PAGE> 67
DEALERS ALLIANCE CREDIT CORP.
STATEMENT OF FINANCIAL CONDITION
JUNE 30, 1996
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS:
- -------
Gross finance receivables $34,947,444
Unearned finance charges (8,092,739)
-----------
Net finance receivables 26,854,705
Unearned ancillary income (50,578)
-----------
Net finance receivables after ancillary 26,804,127
Allowance for credit losses (7,502,390)
Deferred acquisition costs, net 142,816
-----------
19,444,553
Cash and cash equivalents 687,806
Repossessed collateral 603,512
Furniture and equipment, net 233,332
Prepaid rent, net 200,243
Subordinated debt issuance costs, net 280,589
Other assets, net 323,007
-----------
$21,773,042
===========
LIABILITIES AND COMMON STOCKHOLDERS' DEFICIT:
- --------------------------------------------
Revolving credit agreement advances $18,000,000
Accounts payable and accrued expenses 671,331
Due to related party 8,017
Senior Subordinated notes payable, net 3,513,598
-----------
Total liabilities $22,192,946
-----------
Warrants 563,767
Redeemable Series A Convertible Preferred Stock, $0.01 par value;
200,000 shares authorized, 176,746 issued and outstanding 8,787,972
Common stockholders' deficit:
Common stock, $0.01 par value; 250,000 shares
authorized, 9,402 shares issued and outstanding 94
Additional paid-in capital 0
Note receivable from stockholder (25,000)
Accumulated deficit (9,746,737)
-----------
Total common stockholders' deficit (9,771,643)
-----------
$21,773,042
===========
</TABLE>
F-32
<PAGE> 68
DEALERS ALLIANCE CREDIT CORP.
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1996
--------------------
<S> <C>
Revenues:
Interest income on finance contracts $3,628,051
Earned ancillary income 99,537
Late charges and other income 139,647
----------
Total finance revenues 3,867,235
Amortization of deferred contract acquisition costs (138,813)
----------
Net finance revenues 3,728,422
Interest expense, net (1,428,357)
----------
Net finance income 2,300,065
----------
Operating Expenses: 2,690,496
----------
Net loss $ (390,431)
==========
</TABLE>
F-33
<PAGE> 69
DEALERS ALLIANCE CREDIT CORP.
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1996
---------------------
<S> <C>
Operating activities
Net loss $ (390,431)
Adjustments:
Provision for credit losses --
Depreciation and amortization 41,956
Amortization of debt discount and organization fees 204,099
Compensatory stock options issued to related party --
Changes in assets and liabilities:
Repossessed collateral (33,633)
Other assets 235,742
Accounts payable and accrued expenses (330,484)
Due to related party (52,094)
----------
Cash provided by (used in) operating activities (325,491)
----------
Investing activities
Purchases of installment contracts receivable (6,145,407)
Payments received on installment contracts receivable 5,721,516
Purchases of equipment (41,995)
Proceeds from sales of assets 3,505
----------
Cash used in investing activities (462,381)
----------
Financing activities
Revolving credit agreement advances 1,150,000
----------
Cash provided by financing activities 1,150,000
----------
Net increase (decrease) in cash and cash equivalents 362,128
Cash and cash equivalents at beginning of period 325,678
----------
Cash and cash equivalents at end of period $ 687,806
==========
</TABLE>
F-34
<PAGE> 70
EXHIBIT A
PROPOSED AMENDMENT TO
1994 EMPLOYEE STOCK OPTION PLAN
RESOLVED, that the following amendment to the Company's 1994 Employee
Stock Option Plan is hereby adopted and approved in all respects:
1. The first sentence of subsection (a) of Section 3 of the 1994
Employee Stock Option Plan is amended to read in its entirety as follows:
"Subject to adjustments provided in Section 10 the Company may
grant to Eligible Persons from time to time Options to purchase an
aggregate of up to Five Million (5,000,000) Shares from Shares held in
the Company's treasury or from authorized and unissued Shares."
A-1
<PAGE> 71
EXHIBIT B
PROPOSED AMENDMENTS TO
THE CERTIFICATE OF DESIGNATION FOR
9%/7% CONVERTIBLE PREFERRED STOCK
1. Section 3 of the Certificate of Designation for 9%/7%
Convertible Preferred Stock shall be amended in its entirety to read as
follows:
"SECTION 3. Dividends. The holders of the Convertible
Preferred Stock shall be entitled to receive, out of any funds legally
available, non-cumulative dividends at the annual rate of $0.315
[$2.52* per share (i.e., 9% of $3.50 [$28.00]* liquidation preference)
per annum until March 31, 1999 (the "End Date") and thereafter at the
rate of $0.245 [$1.96]* per share (i.e., 7% of $3.50 [$28.00]*
liquidation preference) per annum from the day following the End Date.
Dividends with respect to those shares of Convertible
Preferred Stock issued pursuant to the Third Amended Joint Plan of
Reorganization (the "Plan") of the Corporation and its subsidiaries in
the Chapter 11 bankruptcy proceedings styled In re Automobile Credit
Finance 1991-III, Inc., Automobile Credit Finance, Inc., Automobile
Credit Partners, Inc., Automobile Credit Finance 1992-II, Inc.,
Automobile Credit Finance III, Inc., Automobile Credit Finance IV,
Inc., Automobile Credit Finance V, Inc., and Automobile Credit Finance
VI, Inc., Case Nos. 395-34981-RGM-11 through 395-34988-SAF-11, U.S.
Bankruptcy Court, Northern District of Texas, Dallas Division (the
"Bankruptcy Proceedings"), will begin to accrue from July 1, 1995. In
connection with the issuance by the Corporation of any shares of
Convertible Preferred Stock pursuant to the Plan, the Corporation will
pay in cash the dividends that accrued on such shares from July 1,
1995 through the effective date of the Plan, which is March 15, 1996
(the "Effective Date"). Thereafter, the initial quarterly payment of
dividends on the shares issued pursuant to the Plan will be based on
the accrual period from the Effective Date to the end of the first
full calendar quarter following the Effective Date.
The Corporation may not pay dividends on the Convertible
Preferred Stock except in cash until all accrued dividends have been
paid by the Corporation in cash on the Convertible Preferred Stock for
the period beginning with the Effective Date and ending with the first
anniversary of the Effective Date. After the accrued dividends have
been paid in cash by the Corporation for such period, dividends will
continue to be paid entirely in cash unless the Corporation is
prohibited from paying the dividends entirely in cash by Delaware law
(the state of its incorporation) or by the terms of any loan agreement
of $5,000,000 or more. If the Corporation is prevented from paying a
dividend entirely in cash, it will pay a dividend in the form of a
mixture of cash and common stock of the Corporation ("Common Stock")
to the extent possible under Delaware law and any applicable loan
agreement, or if necessary, entirely in Common Stock, provided the
average market price per share of the Common Stock is $.50 [$4.00]* or
greater for the 20 trading day period ending five days prior to the
date of payment of the Common Stock dividend. The value of any shares
of Common Stock paid out as a dividend on the Convertible Preferred
Stock shall be based on the average market price of the Common Stock
for the 20 trading day period ending five days prior to the date of
payment of the Common Stock dividend. For purposes of this Section,
the market price of the Corporation's Common Stock shall be determined
by using the closing sales price as reported by Nasdaq, if the Common
Stock is quoted by Nasdaq, or any national stock exchange on which the
Common Stock is listed for trading (or if such stock is only traded
over-the-counter, the average of the closing bid and asked prices).
If there is no established market for the Common Stock, the market
price shall be the fair market value of the Common Stock as determined
by the good-faith judgment of the Board of Directors.
- ----------------------------------
*Note: Numbers in brackets will be substituted for immediately preceding
numbers if Reverse Split Amendments proposed in the Proxy Statement are
approved by the shareholders.
B-1
<PAGE> 72
If a dividend upon any shares of the Convertible Preferred
Stock, or any other outstanding stock of the Corporation ranking on a
parity with the Convertible Preferred Stock, or any other outstanding
stock of the Corporation ranking on a parity with the Convertible
Preferred Stock as to dividends, is in arrears, no stock of the
Corporation standing on a parity with the Convertible Preferred Stock
as to dividends may be purchased or otherwise acquired for any
consideration by the Corporation except pursuant to an acquisition
made pursuant to the terms of one or more offers to purchase all of
the outstanding shares of the Convertible Preferred Stock and all
stock of the Corporation ranking on a parity with the Convertible
Preferred Stock as to dividends (which offers shall describe such
proposed acquisition of all such parity stock). Unless otherwise
declared by the Board of Directors or required by this Certificate of
Designation, no dividends shall accrue or cumulate for any calendar
quarter (or portion thereof) during which a liquidation, dissolution
or winding up of the Corporation occurs."
2. Section 4 of the Certificate of Designation for 9%/7%
Convertible Preferred Stock shall be amended to read in its entirety as
follows:
"SECTION 4. Dividend Payment Dates; Accrual Periods. Except
to the extent otherwise provided by Section 3 above, quarterly
dividends on each share of Convertible Preferred Stock (a) shall
accrue from the date of issuance of such share through the last day of
the calendar quarter in which the share was issued and thereafter from
the first day of each calendar quarter through the last day of such
calendar quarter, and (b) shall be paid on the 15th day of the month
following the end of each calendar quarter to the holder of record of
such share at the close of business on the last day of the calendar
quarter."
3. The third paragraph of Section 9 of the Certificate of
Designation for 9%/7% Convertible Preferred Stock shall be amended to read in
its entirety as follows:
"Upon the seventh anniversary of the Effective Date, the
number of persons constituting the Board of Directors shall be reduced
by the number of Directors then in office elected pursuant to this
Section 9, the term of office of said Directors so elected shall end,
and holders of the Convertible Preferred Stock shall be divested of
their special class voting rights in respect of subsequent elections
of Directors."
4. The fifth paragraph of Section 9 of the Certificate of
Designation for 9%/7% Convertible Preferred Stock shall be amended to read in
its entirety as follows:
"Prior to the seventh anniversary of the Effective Date, the
Corporation will not, without the affirmative vote or consent of
holders of at least 50% of the outstanding shares of Convertible
Preferred Stock, voting as a single class (i) merge with another
company when the members of the Board of Directors of the Corporation
immediately prior to the merger do not constitute a majority (x) of
the members of the Board of Directors of the Corporation if it
survives the merger or (y) of the board of directors of the surviving
company if the Corporation does not survive the merger, and (ii) sell
more than 50% of the Corporation's assets."
5. Subsection (g) of Section 10 of the Certificate of Designation
for 9%/7% Convertible Preferred Stock shall be amended to read in its entirety
as follows:
"(g) Mandatory Conversion. The Corporation may, at its
option, call for the mandatory conversion, in whole or in part, of up
to fifty percent (50%) of the issued and outstanding shares of
Convertible Preferred Stock under the following conditions: (i) the
Corporation's Common Stock trades at a market price of $4.25 [$34.00]*
per share or higher on each of any 20 trading days in a period of 30
consecutive trading days, beginning with the first day following the
second anniversary of the Effective Date and ending on the third
anniversary of the Effective Date, or (ii) the Corporation's Common
Stock trades at a market price of $3.50 [$28.00]* per share or higher
on each of any 20 trading days in a period of 30 consecutive trading
days, beginning with the first day following the third anniversary of
the Effective Date and ending on the day immediately preceding the
Final Conversion Date (as defined herein). The
B-2
<PAGE> 73
trigger prices per share of $4.25 [$34.00]* and $3.50 [$28.00]* shall
be subject to adjustment by the Board of Directors if and when, and in
appropriate proportion to, any adjustment to the conversion rate of
the Convertible Preferred Stock is made pursuant to subsection 10(c)
hereof. In the event the Corporation elects to call for the
conversion of a portion of the Convertible Preferred Stock issued and
outstanding pursuant to clause (i) or (ii) above, then the Corporation
shall select the shares to be converted to the effect that to the
extent practicable each holder of shares of the Convertible Preferred
Stock shall have a pro rata portion of his or her shares converted.
The Corporation shall cause a notice of the mandatory
conversion pursuant to the immediately preceding paragraph to be
mailed, postage prepaid, to the holders of the Convertible Preferred
Stock at their respective addresses appearing on the share transfer
records of the Corporation. The Board of Directors may elect to
specify an effective date for such conversion ("Effective Conversion
Date"), which date may be no later than sixty (60) days after the
Board meeting or consent at which the Corporation's election to
convert was duly adopted. If no Effective Conversion Date is
specified by the Board of Directors, the Effective Conversion Date
shall be the date of the initial mailing of the required notice. Such
notice shall set forth the number of shares of the Convertible
Preferred Stock that are mandatorily converted as of the Effective
Conversion Date with respect to each holder thereof, and the address
of the place where such shares of the Convertible Preferred Stock
shall be exchanged, upon presentation and surrender of the
certificates representing such shares, and the certificates
representing the shares of Common Stock shall be delivered. The
dividends on the shares of Convertible Preferred Stock called for
conversion shall cease to accrue on the Effective Conversion Date.
Any notice which is mailed in the manner provided herein shall be
conclusively presumed to have been duly given, whether or not the
holder of the shares of the Convertible Preferred Stock receives such
notice, and failure to duly give such notice by mail, or any defect in
such notice, to any holder of shares of the Convertible Preferred
Stock shall not affect the validity of the conversion thereof into
Common Stock. Consequently, as of the close of business on the
Effective Conversion Date, all shares of the Convertible Preferred
Stock called for conversion, regardless of whether notice of
conversion is actually received by the holder, shall automatically be
deemed to be the shares of Common Stock into which such shares could
have been voluntarily converted by the holders thereof. As of the
close of business on the Effective Conversion Date, the Convertible
Preferred Stock called for conversion shall be deemed to cease to be
outstanding or to accrue dividends, the persons entitled to receive
the Common Stock issuable upon conversion shall be treated for all
purposes as the registered holders of such Common Stock and all rights
of any holders of the Convertible Preferred Stock called for
conversion shall thereupon be extinguished except the right to receive
the Common Stock in exchange therefor and any accrued and unpaid
dividends thereon. Holders of the Convertible Preferred Stock called
for conversion must surrender the certificates representing such stock
in order to receive the Common Stock into which such Convertible
Preferred Stock has been converted.
The Corporation shall be obligated to pay, within 30 days
after the Effective Conversion Date, any accrued and unpaid dividends
on the shares of Convertible Preferred Stock called for conversion, to
the holders who, on the Effective Conversion Date, held such shares of
Convertible Preferred Stock.
Any previously unconverted Convertible Preferred Stock shall
be automatically and mandatorily converted on the seventh anniversary
of the Effective Date (the "Final Conversion Date"). For the purpose
of the conversion on the Final Conversion Date, each share of
Convertible Preferred Stock shall be convertible into a number of
shares of Common Stock which shall equal the lesser of (i) three
(which number shall be subject to adjustment by the Board of Directors
if and when, and in the same proportion as, any adjustment in the
conversion rate of the Convertible Preferred Stock is made pursuant to
subsection 10(c) hereof), or (ii) the result of dividing the $3.50
[$28.00]* liquidation preference for the Convertible Preferred Stock
by the market price of the Common Stock as reported at the close of
business on the Final Conversion Date (or if such date is not a
trading day, on the first trading day immediately preceding the Final
Conversion Date).
The Corporation shall cause a notice of such mandatory
conversion on the Final Conversion Date to be mailed, postage prepaid,
to the holders of record of the Convertible Preferred Stock at their
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<PAGE> 74
respective addresses appearing on the share transfer records of the
Corporation. Such notice shall set forth a statement that all
outstanding shares of the Convertible Preferred Stock shall be
automatically and mandatorily converted as of the Final Conversion
Date and the address of the place where such shares of Convertible
Preferred Stock shall be exchanged, upon presentation and surrender of
the certificates representing such shares, and the certificates
representing the shares of Common Stock shall be delivered. The
dividends on such shares shall cease to accrue on the Final Conversion
Date. Any notice which is mailed in the manner herein provided shall
be conclusively presumed to have been duly given, whether or not the
holder of the shares of the Convertible Preferred Stock receives such
notice, and failure to duly give such notice by mail, or any defect in
such notice, to any holder of shares of the Convertible Preferred
Stock shall not affect the validity of the conversion thereof into
Common Stock. Consequently, all issued shares of the Convertible
Preferred Stock, as of close of business on the Final Conversion Date,
regardless of whether notice of conversion is actually received by the
holder, shall automatically be deemed to be the shares of Common Stock
into which such shares are converted. As of the close of business on
the Final Conversion Date, the Convertible Preferred Stock shall be
deemed to cease to be outstanding or to accrue dividends, the persons
entitled to receive the Common Stock issuable upon conversion shall be
treated for all purposes as the registered holders of such Common
Stock and all rights of any holders of the Convertible Preferred Stock
shall thereupon be extinguished except the right to receive the Common
Stock in exchange therefor and any accrued and unpaid dividends
thereon. Holders of the Convertible Preferred Stock must surrender
the certificates representing such stock in order to receive the
Common Stock into which such Convertible Preferred Stock has been
converted. The Corporation shall be required to declare and pay all
cumulated unpaid dividends that accrue through the Final Conversion
Date as soon as practicable following the Final Conversion Date.
After the conversion of all issued shares of the Convertible
Preferred Stock, all shares of the Convertible Preferred Stock shall
be canceled, the Convertible Preferred Stock shall not be reissued and
shall be deemed canceled and shall revert to authorized but unissued
Preferred Stock of the Corporation, undesignated as to series, and the
number of shares of Preferred Stock which the Corporation shall have
authority to issue shall not be decreased by such conversion.
For purposes of this subsection (g), the market price of the
Corporation's Common Stock shall be determined by using the closing
sales price as reported by Nasdaq, if the Common Stock is quoted by
Nasdaq, or any national stock exchange on which the Common Stock is
listed for trading (or if such stock is only traded over-the-counter,
the average of the closing bid and asked prices). If there is no
established market for the Common Stock, the market price shall be the
fair market value of the Common Stock as determined by the good-faith
judgment of the Board of Directors."
B-4
<PAGE> 75
EXHIBIT C
PROPOSED AMENDMENTS TO
RESTATED CERTIFICATE OF INCORPORATION
RESOLVED, that the following amendments to the Company's Restated
Certificate of Incorporation are hereby adopted and approved in all respects:
1. The first paragraph of Paragraph FOURTH of the Restated
Certificate of Incorporation is hereby amended to read in its entirety as
follows:
"FOURTH. The aggregate number of shares of all classes of
stock which the Corporation shall have the authority to issue is One
Hundred Ninety Million (190,000,000), of which One Hundred Thirty
Million (130,000,000) shares shall be Common Stock, of the par value
of $.01 per share, and Sixty Million (60,000,000) shares shall be
Preferred Stock, of the par value of $.01 per share. At the effective
time of this amendment to the Restated Certificate of Incorporation of
the Corporation, each eight (8) issued and outstanding shares of
Common Stock of the Company ("Old Common Stock") shall be combined
into one (1) share of validly issued, fully paid and nonassessable
Common Stock of the Corporation ("New Common Stock"), and each eight
(8) issued and outstanding shares of Preferred Stock of the Company
("Old Preferred Stock") shall be combined into one (1) share of
validly issued, fully paid and nonassessable Preferred Stock of the
Corporation ("New Preferred Stock"). No scrip or fractional shares
shall be issued by reason of this amendment. Notwithstanding any
contrary term of a Certificate of Designation for the Preferred Stock,
no adjustments in the conversion rates of the Preferred Stock shall
result by reason of this amendment. Each certificate that represented
shares of Old Common Stock shall thereafter represent the number of
shares of New Common Stock into which the shares of Old Common Stock
represented by such certificate shall be combined and reclassified;
provided, however, that each person holding of record a stock
certificate or certificates that represented shares of Old Common
Stock shall receive, upon surrender of such certificate or
certificates, a new certificate or certificates evidencing and
representing the number of shares of New Common Stock to which such
person is entitled. Each certificate that represented shares of Old
Preferred Stock shall thereafter represent the number of shares of New
Preferred Stock into which the shares of Old Preferred Stock
represented by such certificates shall be combined and reclassified;
provided, however, that each person holding of record a stock
certificate or certificates that represented shares of Old Preferred
Stock shall receive, upon surrender of such certificate or
certificates, a new certificate or certificates evidencing and
representing the number of shares of New Preferred Stock to which such
person is entitled."
2. The first paragraph of Section 5 of the Certificate of
Designation for the 12% Senior Convertible Preferred Stock is hereby amended to
read in its entirety as follows:
"The 12% Preferred Stock shall not be redeemable at the option
of the Corporation prior to September 30, 1994 (the "Initial
Redemption Date"). The Corporation may at any time redeem all or any
part of the 12% Preferred Stock at the option of the Corporation if
for any ninety (90) day period commencing after the Initial Redemption
Date the average of the following prices exceeds $48.00 per share:
(i) the average of the high bid and low asked prices of the
Corporation's Common Stock if the Common Stock is traded
over-the-counter, (ii) the closing trading price for the Common Stock
if traded on NASDAQ, or (iii) the reported closing price for the
Common Stock if traded on any national or regional stock exchange (the
"Triggering Event"). The redemption price will be $40.00 per share
plus an amount equal to all accrued and unpaid dividends on such
shares."
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<PAGE> 76
3. Section 2 of the Certificate of Designation for 12% Senior
Convertible Preferred Stock is hereby amended to read in its entirety as
follows:
"SECTION 2. Number of Shares. The number of shares of 12%
Preferred Stock is 400,000 of the par value of $0.01 per share with a
liquidation preference of $40.00 per share which number of shares the
Board of Directors may increase or decrease but may not decrease below
the number of shares of the series then outstanding."
4. The first sentence of Section 3 of the Certificate of
Designation for 12% Senior Convertible Preferred Stock is hereby amended to
read in its entirety as follows:
"The holders of 12% Preferred Stock shall be entitled to receive out
of any funds legally available, if, as and when declared by the Board
of Directors, cumulative dividends in cash at the rate of $4.80 per
share per annum payable quarterly but no more."
5. The first paragraph of Section 6 of the Certificate of
Designation for 12% Senior Convertible Preferred Stock is hereby amended to
read in its entirety as follows:
"SECTION 6. Liquidation Rights. The holders of 12% Preferred
Stock shall, in case of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs (a "Liquidation") of the
Corporation, be entitled to receive in full out of the net assets of
the Corporation before any amount shall be paid or distributed among
the holders of the Common Stock or any other shares ranking junior to
the 12% Preferred Stock, an amount equal to $40.00 per share plus in
each case an amount equal to all accrued and unpaid dividends. If
upon any Liquidation of the Corporation, the assets available for
distribution to the holders of 12% Preferred Stock and any other stock
of the Corporation which shall then be outstanding and which shall be
on a parity with the 12% Preferred Stock upon Liquidation (hereinafter
in this paragraph called the "Total Amount Available") shall be
insufficient to pay the holders of all outstanding shares of 12%
Preferred Stock and all other such parity stock the full amounts
(including all dividends accrued and unpaid) to which they shall be
entitled by reason of such Liquidation of the Corporation, then there
shall be paid to the holders of the 12% Preferred Stock in connection
with such Liquidation of the Corporation, an amount equal to the
product derived by multiplying the Total Amount Available times a
fraction, the numerator of which shall equal the number of outstanding
shares of 12% Preferred Stock multiplied by $40.00 plus any accrued
and unpaid dividends thereon and a denominator of which shall be the
total amount which would have been distributed by reason of such
Liquidation of the Corporation with respect to the 12% Preferred Stock
and all other stock ranking on a parity with the 12% Preferred Stock
upon Liquidation then outstanding had the Corporation possessed
sufficient assets to pay the full amount which the holders of all such
stock would be entitled to receive in connection with such Liquidation
of the Corporation."
6. Section 2 of the Certificate of Designation for 9%/7%
Convertible Preferred Stock is hereby amended to read in its entirety as
follows:
"SECTION 2. Number of Shares. The number of shares of
Convertible Preferred Stock is 30,000,000 with the par value of $0.01
per share and a liquidation preference of $28.00 per share plus any
declared but unpaid dividends, after payment of all debts of the
Company, which number of shares the Board of Directors may increase or
decrease but may not decrease below the number of shares of the series
then outstanding."
C-2
<PAGE> 77
7. The first paragraph of Section 3 of the Certificate of
Designation for 9%/7% Convertible Preferred Stock is hereby amended to read in
its entirety as follow*:
"SECTION 3. Dividends. The holders of the Convertible
Preferred Stock shall be entitled to receive, out of any funds legally
available, non-cumulative dividends at the annual rate of $2.52 (9%)
per share per annum payable from July 1, 1995, to the end of the 12th
full calendar quarter following payment of the first dividend ("End
Date") and thereafter, at the rate of $1.96 per share (7%) per annum
from the day following the End Date until conversion pursuant to
Section 10(g) of this Certificate of Designation (the "Conversion
Date"), but no later than the seventh anniversary of the End Date."
8. The last sentence of the second paragraph of Section 3 of the
Certificate of Designation for 9%/7% Convertible Preferred Stock is hereby
amended to read in its entirety as follows*:
"If the Corporation is prevented from paying a dividend
entirely in cash, it will pay a dividend in the form of a mixture of
cash and common stock of the Corporation ("Common Stock") to the
extent possible under Delaware law and any applicable loan agreement,
or if necessary, entirely in Common Stock, provided the average
closing price of the Common Stock is $4.00 or greater for the 20 day
period ending 5 days prior to the date of payment of the Common Stock
dividend."
9. The first paragraph of Section 6 of the Certificate of
Designation for 9%/7% Convertible Preferred Stock is hereby amended to read in
its entirety as follows:
"SECTION 6. Liquidation Rights. If the Company is
liquidated, the Convertible Preferred Stock will have a preference as
to liquidation proceeds (proceeds from the disposition of assets less
payment of all debts) in the amount of $28.00 per share plus all
accrued and unpaid dividends, if any, after payment of all debts of
the Company. If upon any liquidation of the Corporation, the assets
available for distribution to the holders of the Convertible Preferred
Stock and any other stock of the Corporation which shall then be
outstanding and which shall be on a parity with the Convertible
Preferred Stock upon liquidation (hereinafter in this paragraph called
the "Total Amount Available") shall be insufficient to pay the holders
of all outstanding shares of the Convertible Preferred Stock and all
other such parity stock the full amounts (including all dividends
accrued and unpaid) to which they shall be entitled by reason of such
liquidation of the Corporation, then there shall be paid to the
holders of the Convertible Preferred Stock in connection with such
liquidation of the Corporation, an amount equal to the product derived
by multiplying the Total Amount Available times a fraction, the
numerator of which shall equal the number of outstanding shares of the
Convertible Preferred Stock multiplied by $28.00 plus any accrued and
unpaid dividends thereon and a denominator of which shall be the total
amount which would have been distributed by reason of such liquidation
of the Corporation with respect to the Convertible Preferred Stock and
all other stock ranking on a parity with the Convertible Preferred
Stock upon liquidation then outstanding had the Corporation possessed
sufficient assets to pay the full amount which the holders of all such
stock would be entitled to receive in connection with such liquidation
of the Corporation."
10. The first two paragraphs of subsection 10(g) of the
Certificate of Designation for 9%/7% Convertible Preferred Stock is hereby
amended to read in their entirety as follows*:
"(g) Mandatory Conversion. The Corporation may, at its
option, call for the conversion, in whole or in part, of up to
one-half (50%) of the number of shares of Convertible Preferred Stock
issued as of the Effective Date under the following conditions: (i)
the Corporation's Common Stock trades at $34.00 or higher on each of
any 20 trading days in a period of 30 consecutive trading days,
beginning with the first day following the second anniversary of the
Effective Date and ending on the third
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* Note: See Exhibit B to this Proxy Statement for the provisions of
Sections 3 and 10(g) if the clarifying amendments to the terms of the
9%/7% Convertible Preferred Stock are approved by the stockholders.
The amendments to be effected by the Reverse Split Amendments are
reflected in brackets in the text of such clarifying amendments.
C-3
<PAGE> 78
anniversary of the Effective Date, or (ii) the Corporation's Common
Stock trades at $28.00 per share on each of any 20 trading days in a
period of 30 consecutive trading days, beginning with the first day
following the third anniversary of the Effective Date and ending on
the day immediately preceding the Conversion Date. For purposes of
this section, price of the Corporation's Common Stock shall be
determined by using the closing bid price as reported by NASDAQ or
comparable national exchange. The conversion prices shall be subject
to adjustment in the same manner as the conversion rate is adjusted,
as discussed herein.
Any previously unconverted Convertible Preferred Stock (which
shall be a minimum of fifty percent (50%) of the Convertible Preferred
Stock) shall be convertible by Search on the seventh anniversary of
the Effective Date. The Convertible Preferred Stock shall be
convertible into Common Stock at a fraction which has as its
denominator the market price of the Common Stock at the time of
conversion, and which has as its numerator the $28.00 liquidation
value of the Convertible Preferred Stock; provided, however, that in
no event shall the ratio so expressed be higher than 3 to 1."
11. The third and fourth sentences of the second paragraph of
Section 3 of the Certificate of Designation for Series B 9%/7% Convertible
Preferred Stock are hereby amended to read in their entirety as follows:
If the Corporation is prevented from paying a dividend
entirely in cash, it will pay a dividend in the form of a mixture of
cash and common stock of the Corporation ("Common Stock") to the
extent possible under Delaware law and any applicable loan agreement,
or if necessary, entirely in Common Stock, provided the average market
price per share of the Common Stock is $4.00 or greater for the 20
trading day period ending five days prior to the date of payment of
the Common Stock dividend. Such $4.00 minimum market price shall be
subject to adjustment by the Board of Directors upon and in
appropriate proportion to, any adjustment to the conversion rate of
the Series B Preferred Stock pursuant to subsection 10(c) hereof.
12. The first paragraph of subsection 10(g) of the Certificate of
Designation for Series B 9%/7% Convertible Preferred Stock is hereby amended to
read in its entirety as follows:
(g) Mandatory Conversion into Common Stock. The
Corporation may, at its option, call for the mandatory conversion, in
whole or in part, of up to 50% of the issued and outstanding shares of
Series B Preferred Stock under the following conditions: (i) the
Corporation's Common Stock trades at a market price of $34.00 per
share or higher on each of any 20 trading days in a period of 30
consecutive trading days, beginning on March 16, 1998 and ending on
March 15, 1999, or (ii) the Corporation's Common Stock trades at a
market price of $28.00 per share or higher on each of any 20 trading
days in a period of 30 consecutive trading days, beginning on March
16, 1999 and ending on the day immediately preceding the Final
Conversion Date (as defined herein). The trigger prices per share of
$34.00 and $28.00 shall be subject to adjustment by the Board of
Directors upon, and in appropriate proportion to, any adjustment to
the conversion rate of the Series B Preferred Stock pursuant to
subsection 10(c) hereof. In the event the Corporation elects to call
for the conversion of a portion of the Series B Preferred Stock issued
and outstanding pursuant to clause (i) or (ii) above, then the
Corporation shall select the shares to be converted to the effect that
to the extent practicable each holder of shares of the Series B
Preferred Stock shall have a pro rata portion of his or her shares
converted.
C-4
<PAGE> 79
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SEARCH CAPITAL GROUP, INC.
700 NORTH PEARL STREET
SUITE 400
DALLAS, TEXAS 75201-7490
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Mr. George C. Evans and Mr. James F. Leary,
and each of them, as proxies with full power of substitution and revocation, to
represent and vote, as designated on the reverse side, all of the shares of
Common Stock, 12% Senior Convertible Preferred Stock, Series B 9%/7% Convertible
Preferred Stock and 9%/7% Convertible Preferred Stock of Search Capital Group,
Inc. which the undersigned is entitled to vote at the special meeting of
stockholders of Search Capital Group, Inc. to be held on October 1, 1996, or at
any adjournment thereof.
MARK HERE FOR ADDRESS CHANGE
AND NOTE NEW ADDRESS BELOW:
/ /
-----------------------------
-----------------------------
-----------------------------
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED
ENVELOPE.
Continued and to be signed on reverse side
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<PAGE> 80
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/X/ PLEASE MARK VOTES AS IN THIS EXAMPLE.
This proxy when properly executed will be voted in the manner directed herein by
the undersigned stockholder. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
FOR PROPOSALS 1, 2 AND 3.
1. ADOPTION OF THE PROPOSED AMENDMENT TO THE 1994 EMPLOYEE STOCK OPTION PLAN TO
INCREASE THE NUMBER OF SHARES OF COMMON STOCK RESERVED FOR ISSUANCE
THEREUNDER TO 5,000,000.
/ / FOR / / AGAINST / / ABSTAIN
2. ADOPTION OF THE PROPOSED AMENDMENTS TO THE CERTIFICATE OF INCORPORATION TO
CLARIFY THE TERMS OF THE 9%/7% CONVERTIBLE PREFERRED STOCK.
/ / FOR / / AGAINST / / ABSTAIN
3. ADOPTION OF THE PROPOSED AMENDMENTS TO THE CERTIFICATE OF INCORPORATION TO
EFFECT A 1-FOR-8 REVERSE STOCK SPLIT OF COMMON STOCK AND PREFERRED STOCK.
/ / FOR / / AGAINST / / ABSTAIN
4. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER
BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING.
Please sign exactly as name appears here. When shares are held by joint tenants,
both should sign.
Dated: ,1996
----------------------------
----------------------------------------------------------
Signature
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Signature if held jointly WHEN SIGNING AS ATTORNEY,
EXECUTOR, ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE
FULL TITLE AS SUCH. IF A CORPORATION, PLEASE SIGN IN FULL
CORPORATE NAME BY PRESIDENT OR OTHER AUTHORIZED OFFICE. IF
A PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME BY
AUTHORIZED PERSON.
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